What is a pre-refunded bond?

California pre-refunded bonds are usually bonds that were issued when interest rates were higher and now that rates have fallen, it makes sense for that city, state, or agency to issue new bonds at a lower rate and pay off the higher rate bonds with the proceeds.

So when a issuer decides that it is a good time to refund an issue based on the economics of issuing new bonds, the issuer may not be able to call the issue at that time.

Fortunately for investors, most municipal bonds have “call” provisions.  Call provisions are attached to bonds and tell the issuer when they can “call” bonds in or “refund” them.  Issuers can not, at their whim, call in bonds.

Thankfully issuers can not always call bonds, then he will place the proceeds in an account designated to pay off the refunded issue when it becomes callable.  Usually, but not always, the proceeds in the escrow account are invested in US Government bonds.

When this occurs and the funds are in escrow, then it is said that the bonds are “pre-refunded”.

Pre-refunded municipal bonds are the safest of all municipal bond investments as the money is there to pay them off and usually invested in US Treasuries.  Of course because of the high level of safety, the interest rate on “Pre-Re’s” as they are called, is the lowest for all NY municipal bonds.