Optimal Timing of Bond Refunding (Classic Reprint) - Tapa dura

Sinopsis

Excerpt from Optimal Timing of Bond Refunding

Bonds frequently contain a provision whereby the issuer can call the bonds before they have matured. Exercise of this privilege requires notice on the order of 30 to As days, and payment of a premium above par specified in the bond itself. Refunding is the Operation whereby a bond is called and redeemed with the proceeds of a new issue. Although not exclusively so, it is usually carried out in order to reduce the interest cost of borrowed funds. It is the purpose of this paper to examine the decision whether to call a bond or to leave it outstanding.

Basically, the refunding decision must weigh the alternatives of continuing payment of the interest on the outstanding bonds, or to make a present payment in the amount of flotation costs and the call premium in order to achieve lower interest costs when these become available.

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