Bond refunding occurs when a company redeems a callable issue and
A) sells an equity issue, thereby reducing outstanding debt
B) sells a new issue with a lower coupon rate
C) sells a preferred issue with a low dividend rate
D) none of the above is correct

Question

Quizplus · Accepted Answer

Bond refunding refers to the process of redeeming a callable issue by selling a new issue with a lower coupon rate. This allows the company to pay off its debt at a lower cost, thereby reducing its interest expense. Option A is incorrect as selling an equity issue would not reduce outstanding debt, but instead increase the company's equity. Option C is also incorrect as selling a preferred issue with a low dividend rate would not necessarily reduce the company's interest expense. Option D is incorrect as one of the choices must be correct.

Bond Refunding Occurs When a Company Redeems a Callable Issue