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Optimal Bond Refunding: A Practical Approach

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  • Sudipto Sarkar

Abstract

Although there is substantial research on optimal bond refunding, an important real‐life feature is missing from the existing literature: imperfect adjustment or ‘stickiness’ of bond yields to short term interest rate changes. Our model takes this behavior into account, and also has the ability to handle mean reverting interest rates. The results indicate that the former has a significant effect on the optimal refunding policy (especially for longer maturities), but the latter does not. By incorporating these features, our model will hopefully offer a fairly complete and easily implementable guide to managers with regard to the bond refunding decision.

Suggested Citation

  • Sudipto Sarkar, 1997. "Optimal Bond Refunding: A Practical Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(5), pages 685-704, June.
    • Handle: RePEc:bla:jbfnac:v:24:y:1997:i:5:p:685-704
    DOI: 10.1111/1468-5957.00129
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    Cited by:

    1. Sarkar, Sudipto & Hong, Gwangheon, 2004. "Effective duration of callable corporate bonds: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 499-521, March.

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