| Abstract: | The question of when and in what quantity to obtain required bond financing takes on significance due to fixed flotation coats and the opportunity to invest excess long-term debt in marketable securities. In prior research, the optimal size and timing of bond issues is most often determined as the solution to a cost minimization problem. In this paper, we first demonstrate that previous studies have incorrectly identified the opportunity cost of excess debt. We then delineate the opportunity cost in a form consistent with modern capital structure theory. Our results indicate that a firm's capital structure and marginal tax rate are important determinants of the optimal size and timing of its bond issues. |
