Refunding Non-Callable Bonds: A Tax-Oriented Decision Model.

When interest rates fall after the issuance of non-callable debt, the market values of the bonds tend to rise. Purchasing these securities on the open market and issuing replacement debt at current interest rates allows debtor corporations to accelerate the recognition of losses tar tax purposes. Such action also accelerates the bondholders' recognition of taxable long-term capital gains. The debtor corporation, however, has ordinary losses. This article develops a model for measuring the value to corporate shareholders of refunding non-callable bonds, after tax and other transaction costs are taken into consideration.