Prerefunding

Prerefunding

Procedure of floating a second bond at a lower interest rate in order to pay off the first bond at the first call date and to reduce overall borrowing costs.

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prerefunding

The placing of funds with a trustee in order to retire a bond issue as a liability before the call date. Also called advance refunding. See also arbitrage bond.

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Prerefunding

The act or practice of a company issuing a second bond with a lower coupon rate in order to pay off a previously issued callable bond. In this circumstance, the callable bond is referred to as a prerefunded bond. Companies engage in prerefunding when more favorable interest rates become available, reducing the company's overall borrowing costs.

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Prerefunding. Prerefunding may occur when a corporation plans to redeem a callable bond before its maturity date. If that's the case, the bond is identified as a pre-refunded bond.

To prerefund, the issuer sells a second bond with a longer maturity or a lower coupon rate, or both, and invests the amount it raises in US Treasury notes or other securities that are essentially free of default risk.

The specific securities are typically chosen because their maturity dates correspond to the date on which the company will use the money to redeem the first bond.