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Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Advance Refunding Or Prefunding


Let's say you want to buy a shiny Bugatti on credit. It costs a cool $3,000 per month—how can you make sure you can make the payments? Well, you might want to sock away a few Gs in the bank. Even if you have a posh payday, a little extra in the bank can help you out if you spend a little too much at Versace.

Advance prefunding works the same way—but with bonds, not cars. With "safe" bonds, or bonds where an administrator is worried about the cash actually getting to the people for whom it was intended, a prefunding feature can ensure that money is socked away. When a bond is issued, a chunk of money is tucked away safely in a nice escrow account with a bank or trust company so that the odds of the money actually being there for a distribution or a call provision are high.

It's extra netting under the financial high wire.

What happens if a government issues bonds and then runs a little short when it's time to pay up? One option is to issue a new bond to pay off the outstanding bond (that means a past due bond—not great). That's called advance refunding and it buys the issuer a little extra time in paying off their debt.

P.S. The concept is kind of arcane, yeah.