Debt Restructuring: When Do Loan and Bond Prepayments Pay Off?

Journal of Banking and Financial Research (BankArchiv), Vol. 67, No. 1, pp. 39-49 (2019)

21 Pages Posted: 16 Aug 2018 Last revised: 26 Jan 2019

See all articles by Edwin O. Fischer

Edwin O. Fischer

University of Graz/Finance

Ines Wöckl

University of Graz

Date Written: 2019

Abstract

For ten years interest rates in the Eurozone have been declining. This has created a situation where loan or bond prepayments and subsequent refinancing transactions are potentially beneficial for debtors. The advantageousness depends on the costs induced. We analyze the favorability of debt restructuring using the method of differential investment and provide critical limits for the nominal interest rate of the new loan up to which prepayment is optimal. The calculations address both fixed and variable rate loans and consider whether the debt agreement is repaid at maturity or in annuities.

Keywords: debt restructuring, loan prepayments, fixed and variable rate loans

JEL Classification: G21, G31, G32

Suggested Citation

Fischer, Edwin O. and Wöckl, Ines, Debt Restructuring: When Do Loan and Bond Prepayments Pay Off? (2019). Journal of Banking and Financial Research (BankArchiv), Vol. 67, No. 1, pp. 39-49 (2019). Available at SSRN: https://ssrn.com/abstract=3225608 or http://dx.doi.org/10.2139/ssrn.3225608

Edwin O. Fischer

University of Graz/Finance ( email )

Universitätsstrasse
15/G2
Graz, 8010
Austria
+433163803510 (Phone)

Ines Wöckl (Contact Author)

University of Graz ( email )

Universitätsstrasse 15 / G2
Graz, Styria 8010
Austria

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