The corporate and municipal bond equivalent of a homeowner refinancing a mortgage — calling existing higher-rate bonds and reissuing at a lower rate, if the savings justify the upfront costs.
How it works
The interest rate gap applied to face value gives annual savings; discounting that savings stream over the remaining bond term gives its present value, and subtracting the call premium and new issuance costs gives the net refunding benefit.
What this does not include
This does not include the option value of waiting — since rates could fall further before refunding, some analyses also weigh the value of delaying the decision against locking in today’s available savings now.
How to use this calculator
- Enter face value, old and new coupon rates, remaining years, call premium, issuance costs, and discount rate.
Frequently asked questions
Why is there a call premium at all?
Many bonds include a call premium specifically to compensate original bondholders for having their investment redeemed early, before they otherwise would have received the full stream of expected interest payments.
What discount rate should be used for the savings stream?
Often the new (lower) borrowing rate, since that reflects the issuer’s current cost of capital for this type of debt going forward.
Does bond refunding always make sense when rates fall?
Not automatically — the call premium and issuance costs can outweigh the savings for a small rate gap or a short remaining term, which is exactly the tradeoff this calculator is built to check.
