Advantages of Advance Refunding
A current refunding bond allows the issuer to refinance within 90 days of a call date. If interest rates have fallen, the issuer will want to refinance. Suppose, however, interest rates have dropped significantly, and the next call date is not on the near horizon. An advance refunding bond allows the issuer to lock in the lower interest rates now without risking that they rise before the call date arrives and make the refunding less attractive. For the investor, the risk is similar to a callable bond, except that once an advance refunding has occurred, the refunded bond has a reduced default risk (increasing its credit rating) and a set termination date, which combine to increase its value.
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SUMMARY |
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Refundings |
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Current refunding |
Old bonds are fully retired within 90 days of the issuance of the refunding bonds |