Since Bowlin’s  original article on the topic was published, a considerable literature on corporate bond refunding has developed. Most of that literature has concentrated on the question of how to measure the benefit to a company’s shareholders of exercising the call provision associated with an outstanding debt issue (see , , , , , , and ). Among the related concerns have been the matters of whether there are valuation advantages to the deliberate issuance of discount—including “zero coupon’’—bonds (see , , and ), and whether there can be profitable opportunities for refunding prior to maturity debt instruments that were issued at par but later trade at a discount (see , , , , , , and ). Our purpose here is to extend the messages from this literature to identify an additional, but apparently thus far overlooked, possibility for a refunding action that can benefit shareholders: the substitution of new debt for old in a firm’s capital structure in a situation in which the old bonds are selling at a premium over their par value but in which they are not callable. The potential existence of such opportunities can be traced to the same tax laws that for a while made original-issue discount bonds worthwhile—in this case, to the desirability of recognizing in a timely fashion for tax purposes the real economic loss occasioned by having issued high-coupon-rate debt in what subsequently turns out to be a low-interest-rate environment.
ASJC Scopus subject areas
- Economics and Econometrics