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Refunding Bonds
It is federal technique which allows the issuer to
get hold of the lower interest rates when essential
bonds are not callable. The purpose of this saleable
refunding bond is to obtain a taxable government security.
There are several Internal Revenue Code rules that affect
the advance refunding. The important aspect is that
advance refunding for bond issue will made only once.
This escrow account is planned because the principle
and interest earned on the securities are enough to
pay principle, interest, and call premium. These refunding
bonds are secured for payment of taxes or returns pledged
previously for the exceptional bonds. The exceptional
bond i.e. the outstanding debt is usually considered
as void, either lawfully or in materially.
Generally refunding bonds will be treated as arbitrage
bonds, if yield on acquired obligation exceeds the bond
earnings. This restriction oblige the issuers of refunding
bond to acquire United States Treasury – State and Local
Government Series
In refunding bond there are three methods Standard Defeasance,
Crossover Refunding and Gross Defeasance. The Standard
Defeasance bond is used to acquire government securities
from the escrow account. When the amount of securities
required for the escrow account is greater than the
amount of refunded outstanding bonds, the reason is
that the advance refunded for high interest rate bonds
with low interest rate bonds is greater.
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