Advance Refunding

1. A bond issuance used to pay off another outstanding bond. The new bond will often be issued at a lower rate than the older outstanding bond.

2. A bond issuance in which new bonds are sold at a lower rate than outstanding ones. The proceeds are then invested, and when the older bonds become callable they are paid off with the invested proceeds.

Investopedia Says:
1. Advance refunding is most often used by governments seeking to postpone their debt payments to the future instead of having to pay off a large amount of debt in the present.

2. Municipal bonds are traditionally exempt from federal tax, but if a municipal bond is issued in an advance refunding it is no longer tax exempt. This is because municipal bonds tend to have lower rates, and municipalities could potentially use advance refunding to issue unlimited amounts of debt at low rates and invest in higher rate investments.

Related Links:
Investing in bonds - What are they, and do they belong in your portfolio? Bond Basics Tutorial
Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration. Advanced Bond Concepts
Investing in these bonds may offer a tax-free income stream but they are not without risks. The Basics of Municipal Bonds
Find out how to determine whether the tax exemption offered by "munis" benefits you. Weighing The Tax Benefits Of Municipal Securities

Government securities: exchange of maturing government securities prior to their due date for issues with a later maturity. It is through advance refunding that the national debt is extended as an alternative to the economic disruptions that would result from eliminating the debt all at once.

Municipal bonds: 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 would normally have a lower rate than the issue to be refunded, and the proceeds would be invested, usually in government securities, until the higher-rate bonds become callable. This practice, also called prerefunding, has been curtailed by several tax acts. See also Refunding Escrow Deposits (Reds).