Current Refunding: Short-Term Bond Refinance Strategy

Current refunding is the process of refinancing old bonds within a short period before their call date. This financial strategy aims to reduce interest costs or to alter the bond’s maturity structure to better suit the issuer’s financial strategies.

Advance Refunding vs. Current Refunding

• Advance Refunding: Refinancing bonds more than 90 days before their call date.
• Current Refunding: Refinancing bonds within 90 days before their call date.

Mechanics of Current Refunding

In current refunding, the issuer floats new bonds to retire old bonds that are close to their call date. The primary objective is usually to take advantage of lower interest rates, thereby reducing overall interest costs.

Example Scenario

An issuer has bonds with a face value of $10 million, maturing in 10 years with a 6% interest rate. Current market interest rates drop to 4%. By refunding these bonds, the issuer can save 2% annually in interest expenses.

Example Calculation

If the old bond principal is $10 million at 6%:

If the new bond principal is $10 million at 4%:

Importance

Current refunding provides financial flexibility, helps reduce borrowing costs, and can improve a company’s or municipality’s debt profile.

Applicability

Primarily used by corporations and municipalities with outstanding bonds nearing their call dates.

Related Terms

• Bond: A fixed income instrument representing a loan made by an investor to a borrower.
• Call Date: The date on which a bond can be redeemed by the issuer before its maturity.
• Yield: The income return on an investment.

Current Refunding vs. Advance Refunding

• Current Refunding: Performed within 90 days of the call date.
• Advance Refunding: Conducted more than 90 days before the call date, often involving escrow accounts.

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