A transaction in which Refunding Bonds are issued and their proceeds are used to pay Principal, Interest or Redemption price on a prior Issue (the Refunded Bond), including Costs of Issuance, Accrued Interest, capitalized interest on the Refunding Bond, a reserve or replacement fund, or similar costs allocable to the Refunding Bond. A prior Issue is defined as an Issue of obligations all or a portion of the Principal, Interest or Redemption price on which is paid or provided for with proceeds of the Refunding Bond. A prior Issue may be issued before, at the same time as or after the Refunding Bond.

There are generally two major reasons for a Refunding: to reduce the Issuer’s or Borrower’s Interest costs or to remove restrictive covenants imposed by the terms of the Bonds being refunded.

The 2017 Tax Act prohibited the issuance of Advance Refunding Bonds as Tax-Exempt Bonds issued to advance refund Tax-Exempt Bonds. Taxable Bonds may be issued to advance refund prior Tax-Exempt Bonds, and Tax-Exempt Bonds may be issued to advance refund outstanding Taxable Bonds in certain situations, under guidance provided by the IRS Office of Chief Counsel (Chief Counsel Advice Memorandum 201843009).

Types of Refundings

Net Cash Refunding

The most common type of refunding in which the proceeds, together with interest earnings thereon, are structured to produce sufficient funds to pay the principal, interest, and other expenses on the refunded bonds.

Current Refunding

A refunding in which all refunded Bonds are redeemed within ninety days of the issuance of the refunding bonds.

Advance Refunding

A type of refunding transaction in which the refunding bonds are issued more than 90 days before the redemption or final maturity, whichever is earlier, of the refunded bonds.

Dive Deeper on Tax Issues

Learn more about how various aspects of tax law intersect with municipal securities.

See Also


Termination of the rights and interests of the bondholders and release of liens on the security upon final payment of debt service or deposit of guaranteed payment in an irrevocable escrow fund.

Refunding Bond

Bonds issued in a refunding to pay off the refunded bonds.

Refunded Bond

Outstanding bonds which are paid off with all or a portion of the proceeds of refunding bonds.

Escrow Fund

Trust account established in the escrow deposit agreement that holds cash, investments, usually obligations of the federal government or, sometimes, federal agencies, or both, all of which are pledged to the payment of the debt service of the refunded bonds.

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Master (Trust) Indenture

A type of indenture which permits the issuance from time to time of one or more series of bonds under the same indenture in addition to the initial series of bonds.