Refunding is the process of issuing new bonds to replace existing bonds that are about to mature. The purpose of refunding is usually to take advantage of lower interest rates, but it can also be done to extend the maturity of the debt, change the terms of the debt, or raise additional funds.
When a company or government entity refunds bonds, it pays off the remaining balance of the bonds that are about to mature. It then issues new bonds with different terms, such as a different interest rate or maturity date. The new bonds are typically sold to investors in a bond market.
Refunding can be done through a direct exchange offer, in which the holders of the old bonds are given the option to exchange them for the new bonds. Or, it can be done through a tender offer, in which the holders of the old bonds are invited to submit bids to sell their bonds back to the issuer.
The decision to refund bonds is typically made by the issuer's finance team, taking into account a variety of factors such as interest rates, the issuer's credit rating, and the market conditions for selling new bonds.
How do you calculate gain or loss on bond return?
There are a few different ways to calculate the return on a bond, but the most common is to simply take the difference in price from when the bond was purchased to when it was sold, and then divide by the purchase price. For example, if a bond was purchased for $1,000 and sold for $1,200, the return would be 20%.
However, this method doesn't take into account the interest payments that the bondholder would have received while holding the bond. To account for this, we can use the "total return" method, which factors in both the price appreciation/depreciation as well as the interest payments.
For example, let's say a bond has a face value of $1,000 and pays an annual coupon of 5%. This means that the bondholder will receive $50 in interest payments each year. If we assume that the bond is held for 10 years and the price appreciates by 2% each year, the total return would be:
((1+0.02)^10 * 1,200) - 1,000) / 1,000 = 14.69%
Here, we've taken into account both the price appreciation (2% each year) as well as the interest payments ($50 each year).
There are other methods of calculating bond returns as well, but the total return method is the most common.
Why would a company issue refund bonds? Refunding bonds are a type of debt instrument that companies use to refinance their existing debt. The proceeds from the sale of the refunding bonds are used to pay off the outstanding principal and interest on the original debt. The advantage of this type of financing is that it allows the company to take advantage of lower interest rates. What is advance refunding? Advance refunding is when a municipality issues new bonds to refund outstanding bonds before they mature. The municipality does this to take advantage of lower interest rates, to restructure its debt, or for other reasons.
Advance refunding is generally done through a competitive bidding process, in which the municipality solicits bids from investment banks and other financial institutions. The municipality then awards the bid to the institution that offers the lowest interest rate.
Advance refunding can be a complex process, and there are several rules and regulations that municipalities must follow in order to do it. For example, there is a 120-day "lock-up" period during which the municipality cannot refund the bonds. This is to ensure that the municipality does not take advantage of short-term fluctuations in interest rates.
There are also restrictions on how the municipality can use the proceeds from the sale of the new bonds. Generally, the municipality must use the proceeds to pay off the outstanding bonds, pay any associated costs, and deposit any remaining funds into an escrow account.
Advance refunding can be a beneficial way for municipalities to save money on their debt. However, it is important to understand all of the rules and regulations before embarking on this process. What happens when a bond is refinanced? When a bond is refinanced, the issuer pays back the face value of the bond to the bondholders and then issues a new bond with a different interest rate. The new bond may have a different maturity date, coupon rate, and/or face value. What are advanced refunded municipal bonds? Advanced refunded municipal bonds are bonds that have been issued by a municipality and then refunded (or replaced) with a new bond. The new bond typically has a lower interest rate than the original bond, which results in savings for the municipality. The refunded bond may be used to finance capital improvements, operations, or other expenses.