Three essays in corporate bond contract design and valuation

The chapters that comprise this dissertation examine three topics in corporate bond structure and pricing. Chapter 2 addresses why financial theory fails to explain the propensity of firms to include a call provision in long-term debt. I argue that this failure is possibly because the hypothesis is flawed. I offer theoretical support that a put option exists offering outcomes identical to a call option. I also describe a certain agency conflict that cannot be resolved with a call provision. These findings raise serious questions concerning previous investigations of the call option and suggest interesting future research.; Chapter 3 provides an analysis of monthly credit spread data on noncallable and nonputable investment-grade corporate bonds. In contrast to prior research, I find little evidence of a negative relation between credit spreads and interest-rate changes in the 1990s. There is a positive relation between interest-rate changes and credit spread changes for short maturity, investment-grade portfolios. There is no significant relation between interest-rate changes and spread changes for medium maturity portfolios. A negative relation between interest-rate changes and spread changes occurs for top-rated short-term portfolios and for all credit-quality long maturity portfolios. The chapter goes on to explore three additional areas: the relation between credit-spread changes and interest-rate changes over time, the relation between interest-rate changes and monthly returns on major stock indices, and the causes of credit spread changes in long-maturity corporate bonds.; Chapter 4 explores the time-varying structure of changes in corporate bond yields and yields on similar Treasury securities. The difference between corporate bond yields and similar-maturity Treasury bond yields varies considerably over time. I show that when corporate bond excess returns are driven by shocks to corporate bond expected return premiums, corporate bond excess returns display negative serial correlation. Empirical analysis offers evidence that corporate bond excess returns are negatively related to lagged excess returns. Results suggest that the volatility in corporate bond excess returns is driven by time-varying risk premiums. The implications for the equilibrium pricing of credit risk are also discussed.