Premium Debt Swaps, Tax-Timing Arbitrage, and Debt Service Parity

Journal of Applied Finance, Vol. 11, 2001

Posted: 19 Nov 2001

See all articles by John D. Finnerty

John D. Finnerty

Finnerty Economic Consulting LLC; Fordham University - Finance Area

Abstract

A premium debt swap involves exchanging a new issue of high-coupon bonds for similar outstanding high-coupon debt. The swap achieves a tax-timing arbitrage. By reissuing premium bonds, the borrower preserves debt service parity and realizes a net-present-value benefit equal to the difference between the immediate tax deduction of the bond-retirement premium and the present-value tax cost of amortizing the identical original issue premium on the new bonds. The net advantage of refunding is the same as for a cash repurchase but without the undesirable accounting impact.

JEL Classification: G32

Suggested Citation

Finnerty, John D., Premium Debt Swaps, Tax-Timing Arbitrage, and Debt Service Parity. Journal of Applied Finance, Vol. 11, 2001. Available at SSRN: https://ssrn.com/abstract=285556

John D. Finnerty (Contact Author)

Finnerty Economic Consulting LLC ( email )

60 East 42nd Street
Suite 2910
New York, NY 10165
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

Fordham University - Finance Area ( email )

113 West 60th Street
New York, NY 10023
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

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