What happens during Advanced Refunding?

During Advanced Refunding, proceeds from the sale of new bonds are structured specifically for the future repayment of existing bonds that are being refinanced. This process lets an issuer take advantage of lower interest rates or favorable market conditions to reduce overall debt service costs.

In an advanced refunding scenario, the proceeds from the new bonds are typically placed into an escrow account to ensure sufficient funds are available for the scheduled payments of the old bonds, which allows the issuer to lock in lower rates while continuing to benefit from the original bond's structure and terms. This results in a more favorable financial position for the municipality, as these proceeds are earmarked to cover future obligations rather than being applied to current liabilities immediately.

In contrast, current bonds are not paid off immediately as part of this process; rather, they are considered in the context of future cash flows and payments coordinated through the escrow arrangement. Additionally, interest payments often remain tax-exempt unless the bond terms change in a way that alters this status, and deferred gains are not directly recognized in income during this process.