Let's say you want to buy a shiny, used Bugatti on credit. The debt service costs a cool $3,000 per month—how can you make sure you can make the payments? Well, you might want to sock away a bunch of Gs in the bank.
Advance prefunding works the same way—but with bonds, not cars. With "safe" bonds, or bonds where an administrator is worried about the cash actually getting to the people for whom it was intended, a prefunding feature can ensure that money is socked away.
When a bond is issued, a chunk of money is tucked away safely in a nice escrow account with a bank or trust company so that the odds of the money actually being there for a distribution or a call provision are high. It's extra netting under the financial high wire.
What happens if a government issues bonds and then runs a little short when it's time to pay up? One option is to issue a new bond to pay off the outstanding bond (that means a past due bond—not great). That's called advance refunding, and it buys the issuer a little extra time in paying off their debt.
P.S. The concept is kind of arcane.
Related or Semi-related Video
Finance: What is the Debt to Equity Rati...18 Views
Finance allah shmoop shmoop What is the debt to equity
ratio or duras It is named in insane asylums all
over the world Well it's a balance sheet computation that
tries very roughly to measure how efficient a company is
using its precious capital resource is the numerator comprises long
term liabilities on ly For most companies with debt the
amount of long term debt vastly outweighs the short term
So they ignore the short The denominator is the company's
shareholder's equity Easy You know that computation right ale and
think that's the capital invested in the business that's what
Isthe so what does it mean to have a high
durer Well if shmoop a loops llc a producer of
the most delicious cereal on the planet has four billion
dollars of debt And on lee fourteen dollars of equity
will you don't have to be a wall street genius
to get that that's bad right Tons of debt almost
no equity It means that loans comprise some ninety nine
percent of the company and well that it is essentially
owned by the bank and other creditors not by the
equity stake holders And you want steak Flip things around
Your cisco networks with a billion dollars of debt and
like fifty billion dollars of equity Well the shareholders clearly
owned this company The size of the equity dwarfs the
size of the debt Got it Bottom line High ratio
bad low ratio Good at least if you're one of
the owner investors But if you're a banker with a
hankering to own a cereal company well then today you 00:01:33.338 --> [endTime] might be able to just take one over girls
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