When would it make sense for a firm to call a bond issue and refinance?

Question

Quizplus · Accepted Answer

It would make sense for a firm to call a bond issue and refinance when the market price of the bond exceeds the call price, and market interest rates are less than the bond's coupon rate. This allows the firm to save money on interest payments by issuing new bonds at a lower interest rate while using the proceeds to pay off the higher-rate bonds. However, if market interest rates are higher than the bond's coupon rate, it would not be beneficial for the firm to refinance because it would have to pay higher interest on the new bonds. If the market price of the bond is less than the call price, it may not make sense for the firm to call the bond unless the cost savings from refinancing outweigh the call price.

When Would It Make Sense for a Firm to Call