Pre-Refunding Bond


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.

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.

  1. Interest

    The charge for the privilege of borrowing money, typically expressed ...
  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. Call Date

    The date on which a bond can be redeemed before maturity. If ...
  5. Refunding Escrow Deposits - REDs

    A type of forward financial contract that creates an obligation ...
  6. Callable Bond

    A bond that can be redeemed by the issuer prior to its maturity. ...
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