Pre-Refunding Bond

AAA

DEFINITION of 'Pre-Refunding Bond'

A type of bond issued to fund another callable bond, where the issuer actually decides to exercise its right to buy its bonds back before the scheduled maturity date. The proceeds from the issue of the lower yield and/or longer maturing pre-refunding bond will usually be invested in Treasury bills (T-bills) until the scheduled call date of the original bond issue occurs.

INVESTOPEDIA EXPLAINS 'Pre-Refunding Bond'

For example, suppose that in June 2006, XYZ Corp decided to call its 9% callable bond (originally set to mature in 2009) for $1,100 on its first call date of January 2007. In July, XYZ Corp issued a new bond yielding 7% and took all the proceeds from that bond and invested them into T-bills - ensuring that enough money would be available to retire the issue come January.

Using pre-refunding bonds can be a good method for companies to refinance their older issue bonds when interest rates drop.

RELATED TERMS
  1. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
  2. Maturity

    The period of time for which a financial instrument remains outstanding. ...
  3. Bond

    A debt investment in which an investor loans money to an entity ...
  4. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with ...
  5. Refunding Escrow Deposits - REDs

    A type of forward financial contract that creates an obligation ...
  6. Call Date

    The date on which a bond can be redeemed before maturity. If ...
Related Articles
  1. Bond Call Features: Don't Get Caught ...
    Bonds & Fixed Income

    Bond Call Features: Don't Get Caught ...

  2. When Your Bond Comes Calling
    Bonds & Fixed Income

    When Your Bond Comes Calling

  3. Callable Bonds: Leading A Double Life
    Options & Futures

    Callable Bonds: Leading A Double Life

  4. 5 Basic Things To Know About Bonds
    Bonds & Fixed Income

    5 Basic Things To Know About Bonds

Hot Definitions
  1. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  2. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  3. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  4. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  5. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
  6. Macroeconomics

    The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena ...
Trading Center