Which of the following is a benefit of refunding bonds?

The rationale for identifying a lower overall cost of borrowing as a benefit of refunding bonds lies in the fundamental objective of refunding, which is to replace existing debt with new debt that has more favorable terms. When interest rates decrease, an issuer may choose to refund existing bonds to take advantage of the lower rates. By doing so, they can reduce the interest expense associated with the debt, leading to significant savings over the life of the bond.

This situation not only lowers the periodic debt service payments—meaning the amount the issuer must pay at regular intervals—but also decreases the total amount of interest paid over the bond’s duration. This financial maneuvering can free up budgetary resources, allowing the issuer to allocate funds to other critical areas such as infrastructure or public services.

The other options do not align with the primary advantages of refunding bonds. Increased debt service payments would contradict the goal of reducing costs. A reduction in borrower obligations is typically a separate issue not directly tied to the refunding process. Stricter loan covenants might arise from different financial arrangements rather than presenting a benefit of refunding.