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Also known as prefunded bonds, refunded bonds are any type of bond issue in which the funds needed to settle the bonds are already set aside by the original issuer. Typically, the funds needed to take care of that principal amount due on the issued bonds are held in an escrow account, often earning some interest that can eventually go to offset the interest payments made to the bond holders. Considered among the most secure of all bond issues, the refunded bond is usually granted a high rating and serves as a very safe investment for even the most conservative of investors.
With a refunded bond issue, the funds needed to cover the principal paid in by investors is placed into some type of escrow account. An account of this type is held by a third party, often an escrow agent, who has no direct interest or claim on the bond issue involved. The funds deposited in the account are held until the bond issue matures or is called early for some reason, including bankruptcy of the issuer. At that point, the funds can be used to repay or refund the principal investment to the investors, helping to ensure that they at least do not sustain a loss from the venture.
It is important to note that a refunded bond is among the safest investments available. This typically leads to the bond issue being rated highly, both for the low risk involved and the reasonable returns that investors can anticipate to receive. Since enough money is held by an escrow agent or other third party that is authorized to disburse the funds only under specific conditions, investors can rest easy that even if the bond issuer undergoes some sort of financial crisis, up to and including bankruptcy, that initial investment is protected and will be returned.
Brokers and dealers who work with bond issues can assist investors in identifying and evaluating refunded bond issues that are currently available. As with any investing activity with bonds, it is a good idea to determine the financial stability of the issuer, compare the projected returns with similar investment opportunities, and make sure the provisions associated with the purchase of the refunded bond issues are acceptable to the investor. This will further protect the interests of the buyer, since issuers that are financially solvent are less likely to default and leave the investor with little to no profits from the investment.
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