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Bond Refunding with Stochastic Interest Rates

Basil A. Kalymon
Management Science
Vol. 18, No. 3, Theory Series (Nov., 1971), pp. 171-183
Published by: INFORMS
Stable URL: http://www.jstor.org/stable/2629056
Page Count: 13
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Bond Refunding with Stochastic Interest Rates
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Abstract

The bond refunding problem is formulated as a multiperiod decision process in which future interest rates are determined by a Markovian stochastic process. It is assumed that a single bond is to be outstanding at a given time. Given the future requirements for debt financing, the decision maker must decide whether to keep his current bond or to refund by issuing a new bond at the current market interest rates. Over a finite planning horizon, the structure of policies which minimize expected total discounted costs is studied.

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