In a bond refunding, an issuer refinances its debt, often to take advantage of lower interest rates. In a current refunding, new bonds are issued within 90 days of the existing bonds being called, and the new refunding bond proceeds are immediately used to pay off the original refunded bonds. By contrast, in an advance refunding, the call date of the existing bonds is more than 90 days away.
For example, an issuer may have issued 20-year, 6 percent bonds that may be called after 10 years. After 10 years, interest rates for bonds maturing in 10 years may have dropped to 4 percent. The issuer may then issue new bonds maturing in 10 years at 4 percent interest. The issuer calls the existing 6 percent bonds and pays them off with the proceeds from the 4 percent bonds. In doing so, the issuer borrows the same amount of money overall, but saves money on debt service by paying less interest to bondholders.
