A:

Favorable market conditions or the strengthening of a company's credit rating may lead to the refinancing of corporate debt. The two primary factors for influencing a company to refinance are decreases in the interest rate or improvements in the company's credit quality.

When a company issues debt, usually in the form of long-term bonds, it is agreeing to pay a periodic interest charge, known as a coupon, to the bondholders. The coupon rate reflects the current market interest rates and the company's credit rating.

When interest rates drop, the company will want to refinance its debt at the new rate. Because the debt was issued during a time of higher interest rates, the company is paying a larger interest rate than what current market conditions would specify. In this case, the company may refinance by issuing new bonds at the lower coupon rate and use the proceeds to buy back the older bonds. This allows the company to capitalize on the lower interest rate, which allows it to pay a smaller interest charge.

A company's credit rating is reflected in the coupon rate on newly issued debt. A risky company will need to offer lenders a larger return, to compensate them for the additional risk of investing in that company. When a company's credit quality improves, investors won't require such a high return because that company's bonds will be a safer investment. If lenders are requiring a lower return than before, a company will probably want to refinance its older debt at the new rate.

To learn more about corporate borrowing, read When Companies Borrow Money.

RELATED FAQS
  1. How do interest rates affect a bond's coupon rate?

    Find out how the changes in the national interest rate affect the coupon rates of newly issued bonds and why coupon rates ... Read Answer >>
  2. How does a bond's coupon rate affect its price?

    Find out how a bond's coupon rate influences its price, including the role of government-dictated interest rates and the ... Read Answer >>
  3. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >>
  4. What are the key factors that will cause a bond to trade as a premium bond?

    Learn about the primary factor that can cause bonds to trade at a premium, including how national interest rates affect bond ... Read Answer >>
  5. Why do bond coupon rates vary so greatly?

    Learn about the two major reasons that cause bond coupon rates to vary so dramatically and what role coupons play in the ... Read Answer >>
  6. What credit rating should I look for in an oil and gas company?

    Determine what credit rating to look for in an oil and gas company. Credit ratings reflect evaluations by credit agencies ... Read Answer >>
Related Articles
  1. Investing

    How Interest Rates Affect Mutual Funds

    Find out how changing interest rates impact mutual funds, including bond and money market funds, and how higher rates can discourage investors.
  2. Investing

    What's a Debt Security?

    A debt security is a financial instrument issued by a company (usually a publicly traded corporation) and sold to an investor.
  3. Investing

    How Does A Bond’s Coupon Interest Rate Affect Its Price?

    All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays.
  4. Investing

    Explaining the Coupon Rate

    Coupon rate is the stated interest rate on a fixed income security.
  5. Investing

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  6. Investing

    Forces Behind Interest Rates

    Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing.
  7. Personal Finance

    9 Things to Know Before You Refinance Your Mortgage

    Whether or not a mortgage refinance is right for you depends more on individual circumstances than this week's mortgage interest rates.
  8. Investing

    U.S. Corporate Debt at 10-Year High

    More debt is being assumed by companies with dubious credit ratings, raising the specter of defaults.
  9. Investing

    How Do Interest Rates Affect the Stock Market?

    Interest rates can have a complicated ripple effect through financial markets. Here's what you need to know.
  10. Investing

    Six Biggest Bond Risks

    Don't assume that you can't lose money in this market - you can. Find out how.
RELATED TERMS
  1. Coupon Rate

    The yield paid by a fixed income security. A fixed income security's ...
  2. Cost of Debt

    The effective rate that a company pays on its current debt. This ...
  3. Current Coupon Bond

    A bond with a coupon rate that is within 0.5\% of the current ...
  4. Rollover Risk

    A risk associated with the refinancing of debt. Rollover risk ...
  5. Rate Trigger

    A sizeable decline in interest rates that may trigger or cause ...
  6. Bond

    A debt investment in which an investor loans money to an entity ...
Hot Definitions
  1. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  2. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  3. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  4. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
  5. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  6. The Bernie Madoff Story

    Bernie Madoff ran a multibillion-dollar Ponzi scheme that is considered the largest financial fraud of all time.
Trading Center