Pre-Refunding Bond
A type of bond issued to fund another callable bond, where the issuer actually decides to exercise its right to buy its bonds back before the scheduled maturity date. The proceeds from the issue of the lower yield and/or longer maturing pre-refunding bond will usually be invested in Treasury bills (T-bills) until the scheduled call date of the original bond issue occurs. Investopedia Says:
For example, suppose that in June 2006, XYZ Corp decided to call its 9% callable bond (that is originally set to mature in 2009) for $1,100 on its first call date of January 2007. In July, XYZ Corp would have issued a new bond yielding 7% and took all the proceeds from that bond and invested them into T-bills - ensuring that enough money would be availiable to retire the issue come January.
Using pre-refunding bonds can be a good method for companies to refinance their older issue bonds when interest rates drop. Related Terms:
Bond
Call Date
Callable Bond
Coupon Bond
Interest
Interest Rate
Maturity
Maturity Date
Refunding Escrow Deposits - REDs
Treasury Bill - T-Bill |