For what reason would a government most likely undertake a refunding?

A government is most likely to undertake a refunding primarily to achieve interest cost savings and to modify restrictive bond covenants. Refundings are beneficial when a government can take advantage of lower interest rates compared to the rates on its existing debt, allowing it to reduce its overall interest expenditure. This process can result in significant financial benefits for the government, enabling better fiscal management and improved cash flow.

Moreover, refunding may also be utilized to modify or remove restrictive covenants associated with the original bonds. These covenants may impose limitations on the government’s financial operations, and by refunding, the government can negotiate new terms that might be more favorable and provide greater flexibility in managing future financial activities.

Other reasons for refunding, such as increasing the duration of existing debt or complying with state budgeting laws, are less common as primary motivations. Additionally, while stimulating economic growth through new projects is important for government policy, it is not the main driver for undertaking refunding, which is primarily a financial management strategy focused on existing obligations.