Refunding Escrow Deposits

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Refunding Escrow Deposits (REDs)

A financial instrument involving a forward purchase contract that obligates investors to buy bonds at a certain rate when issued. The future date coincides with the first optional call date on an existing high-rate bond. In the interim, investors' money is invested in secondary market Treasury bonds. The Treasuries mature around the call date on the existing bonds, providing the money to buy the new issue and redeem the old one.

A forward contract in which the holder is obligated to purchase a certain bond (usually a municipal bond) with a given yield at some point in the future. Until that purchase is made, the money used to purchase the RED is held in an escrow account and used to buy Treasury securities. This allows the holder of an RED to work around rules against pre-refunding of certain municipal bonds; REDs therefore have a tax advantage.

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