We analyze callable, convertible, and callable-convertible bonds in a dynamic model with restructuring, taxation, and transaction/bankruptcy costs. In this setting, calling when conversion value equals call price is not generally optimal. Late (early) calls are optimal when the conversion ratio...

In a static setting, Green (1984) shows that a warrant contract can eliminate the asset substitution problem created by debt. In contrast, we show that when the firm chooses volatility dynamically, no warrant can eliminate asset substitution, as equity is always risk-loving when the firm is near...

We analyze debt choice in light of taxes and moral hazard. The model features an infinite sequence of nonzero-sum stochastic differential games between equity and debt. Closed-form expressions are derived for all contingent-claims. If equity can increase volatility without reducing asset drift,...