Series 53: Refunding Bonds

Refunding Bonds

Recall that when an existing bond is replaced with a new bond, the new bond is called a refunding bond. The issuer of refunding bonds is usually trying to lower its interest payments by paying off its previously issued (refunded, or prior) bonds with newly issued bonds that pay interest at a lower rate. The issuer may also refund existing bonds to release it from legal covenants or restrictions in the original indenture.

An important distinction between the refunding of a bond and the refinancing of a mortgage is that the refunded bond is not always immediately retired. Instead, the proceeds from the new refunding bonds may be placed in an escrow account, from whi