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BABs not likely to be called
Q
It seems that most of the Build America Bonds (BABs) issued during 2009-2010 had healthy coupons and sold well above par. As a result, their “yields-to-call” were much less than their “yields-to-maturity.” In your opinion, what is the likelihood that BABs will be called (and their yields decreased), if the only reason is to refund debt at a lower interest rate? I’m thinking it’s not likely since interest rates can’t realistically go much lower and the existing 35% federal interest subsidy would not be recovered in any refunding. Or am I off base?
A
James A. Klotz responds:
No, you are not off base at all. You are correct on both counts.
Without the 35% government subsidy, it is highly unlikely the original issuer would be able to borrow at a lower interest rate.
Additionally, without the federal subsidy, investors could be expected to balk at the reduced security of the refunding issue.
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