Financial Terms – Defining ‘Bond refunding’
This Post has been archived and its content might be outdated. If you are looking for recent content, please check this Department's Homepage.
Sudbury recently announced the refunding of $5.08M of bonds originally sold back in 2002 for the Loring School project. So, what is a bond refunding and why do it?
Bond Refunding (refinancing) is the process of redeeming a bond with proceeds received from issuing new lower-cost debt obligations with ranking equal to or superior to the debt to be redeemed.
In this particular instance Sudbury was able to refinance existing debt issued back in 2002 at a True Interest Cost (TIC) of 4.41% for a lower rate of 2.41%. Without extending the 10-year term remaining on the original bonds the new bond issue results in a significant savings of interest to be paid.
Bond refunding may produce a direct savings in debt service paid for by the tax levy. However, the savings is distributed over the term of the remaining debt stream. In this particular instance, the savings is achieved without altering (shortening or extending) the remaining 10 years of the 20-year term.
So, can all bonds be refunded at anytime? (find out in the next installment of Financial Terms)