How often are callable bonds called?

Question

I understand that this is highly dependent on several factors - but as I make calculations with YTM, YTC, and YTW, it would be helpful to understand the (very general) likelihood of a bond being called.

Are these events commonplace, or are they more anecdotal ("yes, it does happen, but rarely")?

For example, with defaults, there is this table of historical default rates by credit rating. While this is by no means representative of any one company's default risk or a specific time period, it helps me get a starting point for the risk premium I would need to place on a bond.

Answer 1

In general, a bond being called is not unheard of. For a specific bond that you're analyzing, though, I don't think you can apply a broad probability. It's very much like using the universal probability of an option being exercised when analyzing a specific option. The specific odds depend on the strike and the characteristics of the underlying stock.

It's the same for a bond. The odds of it being called depend on the characteristics of the bond and the market overall. Since bond prices rise when interest rates fall, bonds are more likely to be called when rates drop. For a corporate bond, they are also likely to rise when the financial strength of the company improves (credit risk drops).