Prerefunding may occur when a corporation plans to redeem a callable bond before its maturity date. If that's the case, the bond is identified as a prerefunded bond.
To prerefund, the issuer sells a second bond with a longer maturity or a lower coupon rate, or both, and invests the amount it raises in US Treasury notes or other securities that are essentially free of default risk.
The specific securities are typically chosen because their maturity dates correspond to the date on which the company will use the money to redeem the first bond.
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- Callable bond, Convertible bond, Indenture, Noncallable, Par Value, redemption, Sinking fund
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