Refunding

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.