Refunding

A A A

DEFINITION

The process of retiring or redeeming an outstanding bond issue at maturity by using the proceeds from a new debt issue. The new issue is almost always issued at a lower rate of interest than the refunded issue, ensuring significant reduction in interest expense for the issuer.

INVESTOPEDIA EXPLAINS

In order to retain the attraction of its debt issues to bond buyers, the issuer will generally ensure that the new issue has at least the same - if not a higher - degree of credit protection as the refunded bonds. Refunding is likely to be more common in a low interest-rate environment, as issuers with significant debt loads have an incentive to replace their maturing higher-cost bonds with cheaper debt.


For example, an issuer that refunds a $100 million bond issue with a 10% coupon at maturity, and replaces it with a new $100 million issue with a 6% coupon, will have savings of $4 million in interest expense per annum.




RELATED TERMS
  1. Refinance

    1. When a business or person revises a payment schedule for repaying debt. 2. ...
  2. Refunded Bond

    Bonds that have their principle cash amount already held aside by the original ...
  3. Corporate Refinancing

    The process through which a company reorganizes its debt obligations by replacing ...
  4. Coupon

    The interest rate stated on a bond when it's issued. The coupon is typically ...
  5. Maturity

    The period of time for which a financial instrument remains outstanding. Maturity ...
  6. Bond

    A debt investment in which an investor loans money to an entity (corporate or ...
  7. Treasury Direct

    The online market where investors can purchase federal government securities ...
  8. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations ...
  9. Collateralized Loan Obligation ...

    A security backed by a pool of debt, often low-rated corporate loans. Collateralized ...
  10. Surrender Period

    The amount of time an investor must wait until he or she can withdraw funds ...
Related Articles
  1. Corporate Bonds: An Introduction To ...
    Bonds & Fixed Income

    Corporate Bonds: An Introduction To ...

  2. How Bond Market Pricing Works
    Bonds & Fixed Income

    How Bond Market Pricing Works

  3. 5 Basic Things To Know About Bonds
    Bonds & Fixed Income

    5 Basic Things To Know About Bonds

  4. Advanced Bond Concepts
    Bonds & Fixed Income

    Advanced Bond Concepts

    By
  5. Bond Basics Tutorial
    Retirement

    Bond Basics Tutorial

  6. Has Stock Bias Affected Your ETF Asset ...
    Bonds & Fixed Income

    Has Stock Bias Affected Your ETF Asset ...

  7. Buying bonds at a premium? Note these ...
    Bonds & Fixed Income

    Buying bonds at a premium? Note these ...

  8. Is Ukrainian Debt Worth a Look?
    Bonds & Fixed Income

    Is Ukrainian Debt Worth a Look?

  9. Will The High Times In High Yield Continue? ...
    Bonds & Fixed Income

    Will The High Times In High Yield Continue? ...

  10. Unconstrained Investing: What It Is ...
    Bonds & Fixed Income

    Unconstrained Investing: What It Is ...

comments powered by Disqus
Hot Definitions
  1. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash or spot price of a commodity is below the futures contract price. Cash and carry transactions are considered arbitrage transactions.
  2. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  3. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  4. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  6. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
Trading Center