Refunding Escrow Deposits - REDs

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Dictionary Says

Definition of 'Refunding Escrow Deposits - REDs'


A type of forward financial contract that creates an obligation for its investors to purchase a particular bond issue at a specified yield at some date in the future. The money from investors is held in escrow and is used to purchase interest-bearing U.S. Treasuries, which are either sold or allowed to mature, providing proceeds to be invested into the new bond issue with an interest rate that is locked in with a forward contract.

Investors participate early in the new bond issue (typically municipal bond) but will temporarily receive taxable income from the Treasury held in escrow.



Investopedia Says

Investopedia explains 'Refunding Escrow Deposits - REDs'


The issuance of REDs allows investors and underwriters to circumvent restrictions in the tax code that don't allow for certain municipal bond issues to be pre-refunded. Pre-refunding is a common strategy for issuers of municipal debt, as minor swings in interest rates can amount to millions of dollars in saved interest.




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