Analysis of Municipal Refunding Policies: A 50 Year Historical Approach
20 Pages Posted: 28 Jan 2015
Date Written: December 10, 2014
The most common tax-exempt fixed-rate bond series structure in the $3.7 trillion US tax-exempt bond market includes callable debt for maturities greater than ten years. The decision as to when to refund (refinance) these bonds to generate interest cost savings is an important one historically manifested by the use of various heuristic criteria. Some municipal issuers codify these criteria and formally adopt them into what is commonly called a refunding policy. In this paper we measure and evaluate the performance of several dozen refunding policies through the lens of history. Using municipal and Treasury yield data dating to 1965, we calculate realized present value savings from various refunding policies under different monetary conditions. Among the dozens of policies examined, a single, new policy stands alone in realizing significantly greater present value savings than any other.
Keywords: Refunding, Municipal Bonds, Tax-exempt, Public Finance, Yield Curve, Options
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