Summary A refunding bond issue is one whose proceeds are used to retire the outstanding debt of a prior bond issue. Advantages Refunding bonds can result in savings if the interest rate on the new bonds is lower than the interest rate on the existing bonds. Refunding bonds can be used to remove restrictive bond covenants that apply to existing bonds.
Governments can use refunding bonds to restructure debt service payments.
Disadvantages Refunding bonds have the same types of issuance costs as a new issue, thus the government in essence repeats these costs during the life of the debt. Advance refundings can be done only once during the life of a bond, so the issuer must identify the most advantageous time to refund. Advance refundings are not allowed for private activity bonds. A refunding bond is a type of bond whose proceeds are used to retire the outstanding debt of a prior bond issue. Lower interest rates are the most common reason for refunding.