A bond which is mainly issued to refinance previously issued bonds that carry higher coupons than current market. An advance refunded bond allows the municipal issuer to refund its debt long before the first call date. When interest rates plummet, and the Treasury bonds yield more than municipal bonds, issuers can use advance refunding bonds to refinance their original debt in advance. The proceeds from these bonds are used to acquire a portfolio of Treasury securities whose cash flows match the principal and interest payment schedule of the original issue. The portfolio of Treasuries is assigned as an escrow which guarantees retirement of the original debt at the first call date. Once the escrow is formed, the payment source for the original bonds is transferred to the advance refunding bonds. In effect, this will help reduce the cost of capital for the municipal issuer, while transforming the original issue to a new one.
This bond is also known as an pre-refunding bond, an escrowed bond, or an escrowed to maturity bond.
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