Pre-Refunding Bond

What is a 'Pre-Refunding Bond'

A pre-refunding bond is 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.

BREAKING DOWN '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. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Term Bond

    Bonds from the same issue that share the same maturity dates. ...
  3. Refunding Escrow Deposits - REDs

    A type of forward financial contract that creates an obligation ...
  4. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  5. Long Bond

    The 30-year U.S. Treasury Bond. The long bond is so called because ...
  6. Premium Bond

    1) A bond that is trading above its par value. A bond will trade ...
Related Articles
  1. Bonds & Fixed Income

    Bond Call Features: Don't Get Caught Off Guard

    Learn why early redemption occurs and how to avoid potential losses.
  2. Bonds & Fixed Income

    How To Invest In Corporate Bonds

    Understand the basics of corporate bonds to increase your chances of positive returns.
  3. Bonds & Fixed Income

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  4. Bonds & Fixed Income

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
  5. Retirement

    Bond Basics: Different Types Of Bonds

    Government Bonds In general, fixed-income securities are classified according to the length of time before maturity. These are the three main categories: Bills - debt securities maturing in less ...
  6. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Bonds

    What they are: Debt securities in which you lend money to an issuer (such as a corporation or government) in exchange for interest payments and the future repayment of the bond’s face value. ...
  7. Bonds & Fixed Income

    Six Biggest Bond Risks

    Don't assume that you can't lose money in this market - you can. Find out how.
  8. Bonds & Fixed Income

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  9. Bonds

    What bonds are: Debt securities where you lend money to an issuer (e.g., a corporation or government) in exchange for interest payments and the future repayment of the bond’s face value. ...
  10. Trading Systems & Software

    How To Analyze Corporate Bonds With Bloomberg Terminals: Valuing Corporate Bonds

    After you have evaluated the credit worthiness of a particular issuer, the next step is deciding upon an appropriate valuation for that bond. There are three good ways to do this. The first method ...
RELATED FAQS
  1. What risk factors should investors consider before purchasing a callable bond?

    Understand the difference between callable and non-callable bonds and consider all the various risk factors associated with ... Read Answer >>
  2. Why do companies issue callable bonds?

    Learn how callable bonds work, how they include an embedded call option, and understand the additional risks that callable ... Read Answer >>
  3. Why doesn't the price of a callable bond exceed its call price when interest rates ...

    A callable bond provides the issuer (borrowing entity) with an option to redeem the bond before its original maturity date. ... Read Answer >>
  4. Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ... Read Answer >>
  5. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
  6. A corporate bond I own has just been called by the issuer. How can a company legally ...

    Bond issues can contain what is referred to as a call provision, which is a right afforded to the issuing company enabling ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center