A bond whose principal is held in an escrow account, generally invested in Treasury securities or something else risk-free, until such time as the bond matures. That means that there is no possibility of default on the principal; as a result, refunded bonds usually have the highest possible credit ratings. They are also called prerefunded bonds.
A bond secured by an escrow fund of U.S. government obligations that is sufficient to pay off the entire issue of refunded bonds at maturity. The rating of the refunded bond generally assumes the rating of the government obligations (highest rating) at the time the fund is established. See also arbitrage bond.