Refunding trusts are used in conjunction with advance refundings to make interest and principal payments on the refunded bonds.
In an advance refunding, new bonds are issued, and the proceeds from the new bonds are put into an escrow account that is part of a refunding trust.
The refunding trustee, likely a bank, manages the money and investments in the refunding trust. From the proceeds of the new bonds, the trustee makes periodic interest payments on the existing higher-rate bonds, plus principal when the original bonds reach their call date.
To guarantee that payments will be made to bondholders, refunding trusts are generally irrevocable, and cannot be modified or revoked after the agreement has been signed.
