What is Prerefunding?

Pre-refunding is a strategy used by corporations to effectively refinance their outstanding debt. In the interim period between the initial issue and the subsequent callable bond issue, proceeds are held in safe Treasury securities.

Are pre refunded bonds safe?

Since pre-refunded bonds are a safe investment, they are very appealing to some conservative investors; however, these bonds do have very low yields. If a bond is not callable, the issuer is not required to pay the full interest amount to the bondholder.

What is a pre-funded bond?

Key Takeaways Pre-funded bond is a government issued, usually municipal, bond where the funds to pay it off at the call date are set aside in an escrow account. Pre-funded bonds are backed by Treasury securities and issued by municipalities that wish to attain a higher credit rating for their debt.

What is calling a bond?

Callable or redeemable bonds are bonds that can be redeemed or paid off by the issuer prior to the bonds’ maturity date. When an issuer calls its bonds, it pays investors the call price (usually the face value of the bonds) together with accrued interest to date and, at that point, stops making interest payments.

What does pre-funded bond mean?

“Pre-funding,” “pre-refunding” and “advance refunding” are synonyms that all refer to setting aside funds to pay off a bond issue on its call date. The call date is the first date on which the issuer can redeem the outstanding bonds, even though the maturity date has not arrived.

What does escrowed to maturity mean?

Escrowed to maturity refers to the placement of funds from a new bond issue in an escrow account to pay off an older bond’s periodic coupon payments and principal. Escrowed to maturity municipal bonds are a form of pre-funded municipal bonds, which are backed by Treasury securities held in an escrow account.

What is Pre-Funded Bond? Pre-funded bond is a government issued, usually municipal, bond where the funds to pay it off at the call date are set aside in an escrow account.

What is a pre-refunded municipal bond?

A pre-refunded municipal bond is a bond that the issuer decided to redeem from the bondholder before its maturity date. Only callable bonds can be considered for early redemption at a lower interest rate, provided that the terms stated in the bond prospectus allow it.

What is the difference between pre-refunded and callable bonds?

The refunded bonds are paid off at a predetermined date, hence, the term “pre-refunded” bond. Using pre-refunding bonds can be a good method for issuers to refinance their older bonds when interest rates drop. A callable bond is one that can be “called” or repurchased from the secondary market by the issuer before the maturity date of the bond.

What are the tax benefits of pre-refunded bonds?

Like most municipal bonds, interest on pre-refunded bonds is exempt from federal income tax and some state taxes. This tax benefit makes pre-refunded bonds an attractive investment option for investors in the high-income tax brackets.