ADVANCE REFUNDING

In the context of municipal bonds , refers to the sale of new bonds (the refunding issue) before the first call date of old bonds (the issue to be refunded). The refunding issue usually specifies a rate lower than the issue to be refunded, and the proceeds are invested, usually in government securities , until the higher-rate bonds become callable . See: Refunding escrow deposits .

Bonds issued to defease an older (usually higher interest rate) issue of bonds. The proceeds of the refunding issue are deposited in an escrow account with a trustee, and the escrow deposit, along with any earnings on it, will be used to redeem the older bonds either at maturity (Escrowed to Maturity) or at a call date (Pre-Refunded). (Pre-refunded bonds are not necessarily escrowed to the first call). Funds deposited in an escrow are usually—but not always--invested in U.S. Treasuries. An issue of new money bonds(the first issue of bonds which raise funds for a project) issued before 1986 may be Advance Refunded no more than twice. (In other words, the Refunding issue may be refunded, but the second refunding issue may not be advance refunded. New money bonds issued after 1985 may be refunded only once. In some case, bonds may only be Current Refunded. For more detailed information, consult the J.C. Bradford & Co. publication "Fundamental Federal Tax Aspects of Municipal Finance." See also All Calls Defeased, Defease, Escrowed to Maturity, Pre-Refunded Bonds, Crossover Refunding, Current Refunding..