Defeasement occurs when an outstanding bond issue is made void, both legally and financially, typically as the result of a refund transaction. Defeased bonds are therefore typically bonds that are either refunded or repurchased by a municipality in cash or with another bond.
For example, a municipality may want to remove debt from its balance sheet by purchasing government securities and pledging them to pay outstanding bond issues. It’s original bond debts are then defeased with the risk-free government securities covering the amount due.
