a firm refunds a debt issue, the firm's stockholders gain and its bondholders lose This points out the risk of a call provision to bondholders and explains why a non-callable bond will typically command a higher price than an otherwise similar callable bond.

Question

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When a firm refunds a debt issue by utilizing a call provision, the bondholders lose because they are forced to give up their higher-yielding investment. On the other hand, the stockholders gain because the refunded debt allows the firm to issue new debt at a lower interest rate. This highlights the risk associated with a call provision for bondholders and is the reason why non-callable bonds are preferred and typically command a higher price than callable bonds.

A Firm Refunds a Debt Issue, the Firm's Stockholders Gain