2.10.4 Refunding of Bonds Flashcards
What is called refunding?
When issuers retire outstanding bonds and issue new ones in their place , it is called refunding.
Bond refunding _______ involve an early redemption.
may or may not
Why would a company issue refunding bonds?
When interest rates fall, a company may want to issue new bonds with lower interest rates.
What are the proceeds of the refunding bonds used for?
The proceeds of the new bond issue are used for retiring the existing old issue.
What is current refunding?
When the issuer uses the proceeds from the refunding bonds to retire the old debt within 90 days of issuance.
What is advance refunding or pre-refunding?
When the old issue of refunded bonds remains outstanding for a period longer than 90 days after the issue of new/refunding bonds.
In advance refunding, do the refunded bonds stay outstanding?
Yes, they may remain outstanding until maturity or some future call date.
When is advance refunding most likely to occur?
When the issuer wants to lock in low interest rates, but the old issue hasn’t reached the call date yet. Therefore, the issuer cannot call the bonds but can issue new ones.
What does defeasance of the refunded bonds mean?
It means that refunded bonds are removed from the balance sheet as an outstanding loan and the old bondholder’s rights and liens on the issuer’s assets are terminated. The new refunding bonds replace teh refunded bonds.
What are the advantages of the defeasance?
1) The refunded bond issue is secured by escrow account as it’s removed from the balance sheet but not totally paid out, thus freeing up the mortgage.
2) The repayment schedule changes for the new bonds, thus providing a longer maturity date.
3) The refunded bonds get the highest rating, as they are fully secured by money in the escrow account.
