Most corporate debt refunding is motivated by interest savings, but similar studies for the state-local sector have found little correlation between cyclical interest rates and refunding. Interest savings is only one reason for refunding and there are possible institutional constraints on state and local call-refunding activities. When annual refunding is deflated by outstandings, the state-local demand to refund is highly sensitive to cyclical interest rates (elasticity coefficient of −2.82 for 1901–1975). This characteristic is also typical for general obligation and nonguaranteed bonds considered separately, and for both “large” and “average” size issues. Interest savings appears to be an important motivation for state-local refunding activity. Finally, state and local governments issue refunding debt in approximately the same relative proportions as private corporations.
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