Most municipal bonds have been structured with a 5% coupon, callable at par in Year 10. Issuers pay for the considerable cost of the par call by accepting a lower sale price. Subsequent refunding, by calling or another means prior to the call date, generates cashflow savings but forfeits valuable call options. This session will explain how to factor the forfeited option value into the refunding decision using the refunding efficiency approach. Five percent bonds callable at par are virtually certain to be refunded by Year 10, even if interest rates increase. To reduce the cost of recurring transactions, the presenter will also explore alternative call structures.
