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Financial Reporting - Debt Refunding
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Why do we refund debt and what are the two types of refunding?
Why done
–Lower market interest rate available
–Eliminate onerous bond covenants
–Free up current pledged revenues
Types of refunding
–Advance Refunding
–Current Refunding
What is Advance refunding?
–Old debt not yet callable
–New debt issued, proceeds placed in irrevocable trust/escrow to meet debt service payments of old debt
Old debt technically outstanding until call date or maturity
–New debt proceeds = “other financing sources”
–Trust/escrow payments = “other financing uses”
What is current refunding?
–Old issue is callable & retired with proceeds of new debt
–New debt proceeds = “other financing sources”
–Payment of old debt = “debt service expenditure”
What are the two types of debt defeasance - advanced refunding only?
–In-substance defeasance
Proceeds placed in irrevocable trust
Liability removed (issuer contingently liable)
Legal defeasance
Proceeds placed in irrevocable trust
Debt legally satisfied even though not repaid
Matter of law
What is arbritrage?
Practice of investing low-yielding tax-exempt bond proceeds in higher-yielding taxable instruments
Author
playboy35
ID
130256
Card Set
Financial Reporting - Debt Refunding
Description
Debt Refunding
Updated
2012-01-24T19:49:16Z
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