advance refunding

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Related to advance refunding: Pre-Refunding

Advance refunding

In the context of municipal bonds, refers to the sale of new bonds (the refunding issue) before the first call date of old bonds (the issue to be refunded). The refunding issue usually specifies a rate lower than the issue to be refunded, and the proceeds are invested, usually in government securities, until the higher-rate bonds become callable. See: Refunding escrow deposits.

Advance Refunding

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 known as a prerefunded bond. Companies engage in advance refunding when more favorable interest rates become available, which reduces the company's overall borrowing costs.

advance refunding

References in periodicals archive ?
Underwriters, however, argue that any premiums added to the Treasury securities were done in order to compensate them for the risks undertaken in connection with advance refunding transactions.
When a Wall Street investment provider adds unjustified markups to the price of advance refunding escrow securities, the refunding escrow's yield is artificially depressed below what it would be had the investments been fairly priced.
Moreover, issuers that choose not to enter closing agreements may be subject to IRS enforcement action and, thus, run the risk that their advance refunding bonds will be declared taxable arbitrage bonds.
Issuers would no doubt find it difficult to market new refinancings and restructurings in view of mandatory disclosure of potential IRS liability on affected advance refunding bond issues, and the possible loss of tax-exempt status.
The calculations in the study upon which Exhibit 1 is based assume only 80 percent of negotiated advance refunding escrows during 1990 to 1995 were affected by $4-per-bond markups.
Treasury securities from its FA for an advance refunding escrow.
The following is a simplified example of an advance refunding calculation.
In a "low to high" advance refunding, the "minor portion," which could equal up to 15 percent of the original refunded issue, could be invested in the escrow account at an unrestricted yield.
In a "high to low" advance refunding, the refunded issue is escrowed to the call date, rather than to the maturity date.
The act imposed restrictions on interest earnings, limited the number of times that an issue can be advance refunded, prescribed rules for calling bonds prior to maturity, prohibited issuers from advance refunding private activity bonds, and stiffened the transferred proceeds penalty (described later in this article).
Also, the act requires that bonds called in an advance refunding which produces savings be called at the first date on which they can be redeemed at a call premium of 3 percent or less.
Most financial advisors will recommend that an issuer pursue an advance refunding whenever it produces savings above a predetermined threshold, such as present value savings equal to 4 percent or 5 percent of the par amount of the refunded bonds, because of the issuance cost and opportunity cost associated with an advance refunding.