What is an “Advance Refunding?”
This post is designed to provide the reader with general information concerning what an “advanced refunding is” and what it accomplishes. Please keep in mind that this information is being provided for informational purposes only and is not designed to be complete in all material respects. Thus, it should not be relied upon as providing legal or investment advice. If you have any questions concerning this post or its contents, you should seek the assistence of a qualified professional.
There are basically two types of advance refundings. One relates to government securities. The other relates to municipal bonds.
An advance refunding relating to government securities is the exchange of maturing government securities prior to their due date for issues with a later maturity. It is through advance refundings that the national debt is extended.
An advance refunding of municipal bonds is the sale of new bonds (the refunding issue) in advance, usually by some years, of the first call date of the old bonds (the issue to be refunded). The refunding issue normally has a coupon rate lower than the issue to be refunded. The proceeds from the refunding issue would usually be invested in government securities until the higher rate bonds become callable. However, this practice has been effected by several tax acts. How, it has been effected should be verified by you prior to making any investment therein.