Refunding Non-Callable Bonds: AN Update of a Tax-Oriented Decision Model in Light of the Tax Reform Act of 1986.

Prior research has demonstrated certain profitable bond refunding opportunities awaiting corporations that issued non-callable bonds during times of relatively higher interest rates [Emery and Lewellen, 1984; Parker, 1986]. This paper analyzes the effect of the Tax Reform Act of 1986 on the profitability cf such transactions. Each of the tour examples presented by Parker [1986] is evaluated comparatively across time using the tax rates and capital gain rules of 1986, 1987 and 1988. The results indicate drastic declines in the values of bond refundings to corporations and shareholders. This impact is due to the decline in both corporate and individual tax rates and to the elimination of the long-term capital gain deduction.