When 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.

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When a firm refunds a debt issue, it typically does so by calling the bonds, which results in bondholders receiving their principal back earlier than expected. This means they no longer receive interest payments and may have to reinvest their funds at a lower interest rate. On the other hand, stockholders benefit because the firm can refinance at a lower interest rate, reducing its overall cost of capital. This dynamic explains why a non-callable bond typically commands a higher price than an otherwise similar callable bond - investors are willing to pay more for the extra security of knowing that the bond cannot be called and their returns disrupted.

When a Firm Refunds a Debt Issue, the Firm's Stockholders