Refunding

Retiring an outstanding bond issue at maturity by using money from the sale of a new offering.

Investopedia Says:
In other words, issuing more bonds to pay off the old bonds that just matured.

1. Process of paying off maturing or outstanding debt with proceeds of a new issue, often at a lower interest cost to the issuer. The U.S. Treasury Department uses the refunding process to replace maturing Treasury bills and notes with new issues.

2. Redemption of a corporate or municipal bond issue prior to the maturity date. This can be advantageous to the issuer if interest rates fall, but disadvantageous to the bondholders. Bond issues are refundable if there is a provision in the Indenture allowing early call or redemption. Some refunding provisions permit early calls with excess funds, but prohibit refunding with the proceeds of a lower interest rate issue.

A call provision allows the bond issuer to pay part or all of the issue early by paying a specified redemption price to the bondholders. Some long-term industrial revenue bonds, however, are callable except for refunding purposes. See also Advance Refunding; Defeasance.

Reimbursing funds in restitution or repayment. The process of refinancing or borrowing money, ordinarily through the sale of bonds, to pay off an existing debt with the proceeds derived therefrom.

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Refunding occurs when an entity that has issued callable bonds calls those debt securities from the debt holders with the express purpose of reissuing new debt at a lower coupon rate. In essence, the issue of new, lower-interest debt allows the company to prematurely refund the older, higher-interest debt.

On the contrary, NonRefundable Bonds may be callable but they cannot be re-issued with a lower coupon rate. i.e. They cannot be refunded.

See also

• Refinancing

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