The Advance Refundings of Municipal Bonds
Event details
| Date | 22.05.2015 |
| Hour | 10:30 › 12:00 |
| Speaker | Richard GREEN (Carnegie Mellon) |
| Location | |
| Category | Conferences - Seminars |
In “advance refundings,” a widespread practice where existing callable debt is defeased by issuing new bonds, issuers lose by pre-committing to call. The average option value lost is 1% of par value, not including fees. This translates to an aggregate value lost of over$7 billion from 1995 to 2013 for the bonds in our sample, which are roughly two-thirds of all advance refunded bonds. A motivation for the transaction is that it enables issuers to borrow, in a non-transparent way, to fund current operating activities in exchange for future higher interest payments. Municipalities in states with more corruption destroy more option value.
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