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.

BREAKING DOWN '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.


RELATED TERMS
  1. Refunded Bond

    Bonds that have their principle cash amount already held aside ...
  2. Pre-Refunding Bond

    A type of bond issued to fund another callable bond, where the ...
  3. Escrow Agreement

    A legal documents that outlines the terms and conditions between ...
  4. Bulk Sales Escrow

    A type of escrow agreement placed on the sale of inventory, business ...
  5. Escrow

    A financial instrument held by a third party on behalf of the ...
  6. Escrowed To Maturity

    The condition of a bond that has been repaid in advance by means ...
Related Articles
  1. Investing

    What does "In Escrow" Mean?

    Escrow is a financial agreement involving two parties, usually a buyer and a seller. The buyer deposits money, securities or other funds into the escrow account, where they are held until both ...
  2. Investing

    The Basics Of Municipal Bonds

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

    Do Municipal Bond Mutual Funds Offer a Tax Incentive?

    Learn about individual municipal securities and municipal bond funds, whose principal stability and tax-free yield appeal to high-income investors.
  4. 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.
  5. Investing

    Taxation Rules For Bond Investors

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

    Why Muni Bonds and Bond Funds are Perfect Together

    Municipal bonds and bond funds differ in several ways, which is partly why they complement each other well.
  7. Financial Advisor

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  8. Investing

    A Look at the Pros and Cons of Muni Bonds

    Considering muni bonds? Here's a look at their pros and cons.
  9. Investing

    Basics Of Federal Bond Issues

    Treasuries are considered the safest investments, but they should still be analyzed when issued.
  10. Investing

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
RELATED FAQS
  1. Does the bank set up an escrow account for the buyer and seller in a home sale?

    Learn about the process of escrow and who is responsible for setting up escrow accounts for the buyer and seller in the purchase ... Read Answer >>
  2. Who manages an escrow account?

    Managing an escrow account is a job for a trusted and experienced service provider. Discover the best personal finance solutions ... Read Answer >>
  3. Do mortgage escrow accounts earn interest?

    Paying down monthly mortgage escrow accounts? Will you receive any interest on this payment? If you are, should you put more ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center