Refunding Escrow Deposits - REDs


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.

  1. Pre-Refunding Bond

    A type of bond issued to fund another callable bond, where the ...
  2. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  3. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
  4. Current Yield

    Annual income (interest or dividends) divided by the current ...
  5. Callable Bond

    A bond that can be redeemed by the issuer prior to its maturity. ...
  6. U.S. Savings Bonds

    A U.S. government savings bond that offers a fixed rate of interest ...
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