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Prerefunding (prere) Financial Glossary

What is it? The sale of bonds used to obtain funds that are then placed in escrow to back bonds previously issued. The first issue typically comprises bonds that were originally issued at high, fixed coupon rates and that could not be called when rates subsequently fell. Since they could not be called, the issuers alternative method for reducing its interest cost for the debt is to issue new, lower cost debt and to use the proceeds of the new bonds to purchase Treasury securities. The interest received from the Treasury securities pays the interest due for the pre-refunded bonds until they can be called or until they mature. The original set of bonds is said to be pre-refunded by the second set of bonds. Those pre-refunded bonds have very little credit risk since the cash for their debt service comes from the Treasury securities and does not depend on the issuer.

Finance Term Definition Added By: Aubrey

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