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Why would a bond issuer decide to issue an advance refunding bond?
A. Because interest rates have risen
B. To lock into the current lower interest rates
C. Because the CPI has gone up
D. To try to increase the yield on their bond issue
Correct Answer: B. To lock into the current lower interest rates
Rationale: A bond refunding is the replacement of existing bonds with new “refunding“ bonds. The issuer of refunding bonds seeks to lower its interest payments by paying off its previously issued (refunded) bonds with newly issued bonds that pay a lower interest rate. An advance refunding bond refers to one in which more than 90 days must elapse before the refunded bond can be retired. An issuer typically uses advance refunding when interest rates have dropped significantly, but the next call date is not in the near future. An advance refunding bond allows the issuer to lock in the lower interest rates now without risking that they rise before the call date arrives.
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