Glossary of Municipal Securities Terms


A procedure whereby an issuer refinances outstanding bonds by issuing new bonds. There are generally two major reasons for refunding: to reduce the issuer’s interest costs or to remove a burdensome or restrictive covenant imposed by the terms of the bonds being refinanced. The proceeds of the new bonds are either deposited in escrow to pay the debt service on the outstanding bonds when due in an “advance refunding” or used to promptly (typically within 90 days) retire the outstanding bonds in a “current refunding.” The new bonds are referred to as the “refunding bonds,” and the outstanding bonds being refinanced are referred to as the “refunded bonds” or the “prior issue.” Generally, refunded bonds are not considered a part of the issuer’s debt because the lien of the holders of the refunded bonds, in the first instance, is on the escrowed funds, not on the originally pledged source of revenues. See: ADVANCE REFUNDING; CURRENT REFUNDING; DEFEASANCE.


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