What is Advance Refunding?
Among the various types of financial structuring that is available to businesses and entrepreneurs is the concept of advance refunding. The process of engaging in advance refunding involves issuing new bonds that are used to repay the outstanding balance on older bonds before the call dates for the older bonds arrive. Here are some facts about the way that advance refunding is usually structured to ensure that the purchaser of the bonds and the issuer are protected. Because the basic principle of advance refunding involves issuing new bonds to pay off outstanding bonds, there has to be some degree of security for the issuer. This is accomplished by using the proceeds from the new issue to invest in government securities, effectively placing the proceeds in escrow. The newer bonds are purchased at a rate that is lower than the longer-maturing bond that it pays off. The interest that is generated off the new bonds is used to pay for the long-maturity bond before the first call date arriv
