What is the purpose of Defeasance in municipal finance?

Prepare for the Certified Municipal Finance Officer Exam. Study with flashcards and multiple choice questions, each question has hints and explanations. Set yourself up for success!

Defeasance in municipal finance serves the crucial function of securing future bond payments through a trust. This involves setting aside funds, typically in government securities or other safe investments, to ensure that sufficient resources are available to meet the future interest and principal payments on outstanding bonds. When a municipal entity executes a defeasance, it effectively removes the associated liabilities from its balance sheet, as the funds guaranteed in the trust can be used to satisfy the debt obligation.

This capability is vital for managing debt and maintaining favorable credit ratings. Additionally, by executing a defeasance, municipalities can create certainty for bondholders, as they have assurance that their investments are protected through the dedicated trust. This process can also aid municipalities in better financial planning, allowing them to forecast their cash flows and obligations more accurately.

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