Refunding Noncallable Debt

Douglas R. Emery, Wilbur G. Lewellen

Research output: Contribution to journalArticlepeer-review

6 Scopus citations


Since Bowlin’s [4] 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 [3], [12], [21], [26], [27], [29], and [31]). 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 [9], [22], and [28]), 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 [1], [2], [13], [15], [17], [18], and [23]). 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.

Original languageEnglish (US)
Pages (from-to)73-82
Number of pages10
JournalJournal of Financial and Quantitative Analysis
Issue number1
StatePublished - Mar 1984
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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