Refunding

Posted in Finance, Accounting and Economics Terms, Total Reads: 362
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Definition: Refunding

Refunding happens when callable bonds are called from the holders with the intent of issuing new bonds or debt instruments with lower interest rates. The issue of lower interest rate debt can help a firm in early repayment of its older, costlier debt.


To ensure that investors buy the callable bonds, the issuer protects the bond holders by providing attractive options in the newly issued bonds. Refundable bonds are beneficial to the issuers.


Example:

An issuer refunding the INR 1 crore, 10% bonds and replacing them with INR 1 crore, 8% bonds saves INR 20 lakhs annually in interest payments.


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