Defeased Securities

AAA

DEFINITION of 'Defeased Securities'

Securities that have been secured by another asset, such as cash or a cash equivalent, by the debt-issuing firm. Firms that have created defeased securities, which are typically bonds, will have sufficient cash set aside for retirement of the debt upon maturity.

INVESTOPEDIA EXPLAINS 'Defeased Securities'

For example, the U.S. government could place the funds necessary to pay off a series of Treasury bonds in a trust account specifically created to pay the outstanding bonds upon maturity. The government sets aside these funds to ensure that it has enough cash to pay its bonds when they are due. Commonly, defeased securities are retractable.

Securities than can be defeased will often carry a lower yield than comparable securities, as the option to retire the debt early favors the issuer and caps the potential investment return for the bondholder. However, for a risk averse investor, this feature proves beneficial because it lowers the default risk of the security.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity ...
  3. Yield

    The income return on an investment. This refers to the interest ...
  4. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, ...
  6. Default Risk

    The event in which companies or individuals will be unable to ...
RELATED FAQS
  1. I have discovered that a bond I am interested in has a sinking fund. What does this ...

    First, understand that a sinking fund provision is really just a pool of money set aside by a corporation to help repay a ... Read Full Answer >>
  2. What do people mean when they say debt is a relatively cheaper form of finance than ...

    In this case, the "cost" being referred to is the measurable cost of obtaining capital. With debt, this is the interest expense ... Read Full Answer >>
  3. What are the main risks to the economy of a country that has implemented a policy ...

    The main risk to the economy of a country that has implemented a policy of austerity is the potential for a self-reinforcing, ... Read Full Answer >>
  4. What is meant by off-the-run treasuries?

    Off-the-run Treasuries have already been published and are currently out on the market. Yield and price quotes published ... Read Full Answer >>
  5. How can I tell if a security is considered investment grade?

    It is possible to tell if a security is considered to be investment grade by looking at that security's ratings with either ... Read Full Answer >>
  6. What is the difference between a bank guarantee and a bond?

    A bank guarantee is a promise from a bank or lending institution that, if a borrower defaults on repayment of a loan, the ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  2. Options & Futures

    Defeasance Reduces Commercial Real Estate Fees

    Try this alternative to short-term variable-rate financing when using leverage to buy property.
  3. Investing Basics

    What's a Debt Security?

    A debt security is a financial instrument issued by a company (usually a publicly traded corporation) and sold to an investor.
  4. Mutual Funds & ETFs

    Why You May Want To Be (And Stay) In Bonds

    Bonds are complicated, and it’s easy to feel intimidated or confused. Fortunately, you don’t need to be a numbers geek to be an informed investor.
  5. Mutual Funds & ETFs

    How To Short The U.S. Bond Market

    The U.S. bond market has enjoyed a strong bull run over the past few years as the Federal Reserve has lowered interest rates to historic low levels.
  6. Investing

    Why Some Investors Are Tilting Toward TIPS

    Last month’s five-year TIPS auction drew nearly $48 billion in interest, a sign of recent renewed demand for this inflation indexed asset among investors.
  7. Mutual Funds & ETFs

    The EMAG Emerging Mkts Bond ETF: Worth the Risk?

    The Market Vectors Emerging Markets Aggregate Bond ETF (EMAG) might offer long-term rewards, but is now the best time to jump in?
  8. Investing

    Feeling Risk-Averse? Consider These Investments

    These investments offer risk-averse investors resiliency to bear markets while paying sustainable dividends or interest.
  9. Mutual Funds & ETFs

    Is the DSUM Yuan Fixed Income ETF a Good Bet?

    An an depth look at PowerShares Chinese Yuan Dim Sum Bond ETF and its risks.
  10. Investing Basics

    Treasury Inflation-Protected Securities (TIPS)

    Treasury inflation-protected securities are treasury securities that make adjustments for inflation as reflected in the Consumer Price Index.

You May Also Like

Hot Definitions
  1. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  2. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  3. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  4. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  5. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!