DEFINITION of 'Pre-Funded Bond'

Bonds issued by a government agency that purchases U.S. government securities to pledge as collateral for the bond issue. Pre-funded bonds are issued by municipalities that wish to attain a higher credit rating for their debt. Since state-issued bonds are not pledged by the full faith of the U.S government, the underlying collateral minimizes the risk of default. The pre-funded bond and the U.S. securities tend to have the same maturity.

BREAKING DOWN 'Pre-Funded Bond'

Pre-funded bonds provide the tax advantages present in regular municipal bonds, but are exposed to less risks. The federal government-based collateral reduces the potential for the issuer's credit to deteriorate.

RELATED TERMS
  1. Collateral Trust Bond

    A bond that is secured by a financial asset - such as stock or ...
  2. Combination Bond

    A bond, typically a municipal bond, that has financial backing ...
  3. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  4. Government Bond

    A debt security issued by a government to support government ...
  5. Closed-End Indenture

    A term in a bond contract that guarantees that the collateral ...
  6. Bond Market

    The environment in which the issuance and trading of debt securities ...
Related Articles
  1. Investing

    Explaining Government Bonds

    A government bond is a debt security a government issues.
  2. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  3. Investing

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  4. Financial Advisor

    Advising FAs: Explaining Bonds to a Client

    Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
  5. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  6. Investing

    Taxation Rules for Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  7. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
  8. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  9. Retirement

    How to Pick the Right Bonds For Your IRA

    Learn about the best types of bonds to include in an IRA depending on an investor's risk tolerance. Understand the tax benefits of holding bonds in an IRA.
RELATED FAQS
  1. Where can I buy government bonds?

    The type of bond determines where you can purchase it, so you need to decide which type of bond you would like to purchase ... Read Answer >>
  2. How do the returns on municipal bonds compare to those of other bonds?

    Learn how tax-free municipal bonds may provide better returns than other types of bonds, and understand the risks of municipal ... Read Answer >>
  3. What do cities do with the funds generated from municipal bonds?

    Learn more about municipal bonds, including the various types of bonds issued and the purposes of municipal bond funds, such ... Read Answer >>
  4. What forms of debt security are available for the average investor?

    Discover the various different types of debt securities, issued by government entities or corporations, that are available ... Read Answer >>
  5. Who or what is backing municipal bonds?

    Learn about the basics of municipal bonds, including the various revenue sources that are utilized to back or secure municipal ... Read Answer >>
  6. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  6. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
Trading Center