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
Date Written: 2019
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: Suggested Citation