SIE: Refunding Of Bonds

Refunding of Bonds

When issuers retire outstanding bonds and issue new ones in their place, it is called refunding. Bond refunding may or may not involve an early redemption. Refunding is similar to a homeowner refinancing her mortgage. When interest rates fall, the homeowner refinances to replace her current mortgage with a new mortgage at a lower rate. Similarly, when interest rates fall, a company may issue new bonds, called refunding bonds, at a lower interest rate. The proceeds of the refunding bonds are for the sole purpose of retiring an existing issue, the refunded bonds.

When an issuer uses the proceeds from the refunding bonds to retire the old debt right away (within 90 days of issuance), it is called a current refunding. Refunding does not mean the old debt must immediately be paid off by the new debt, however. A refunding in which the old issue remains outstanding for a