Municipal Bond Forum
Escrowed vs. pre-refunded muni bonds
Q
What distinction exists between escrowed and pre-refunded municipal bonds? Also, does it only make sense to invest in these types of bonds.
A
James A. Klotz responds:
In the bond market, the term “escrowed” refers to the process of replacing the original obligor of the bonds by securing them with other types of securities, usually U.S. Treasury obligations.
“Pre-refunded bonds” are escrowed until they can be retired at an applicable call date.
Bonds can also be “Escrowed to Maturity” (ETM). These bonds will not be retired prior to maturity other than through a sinking fund call or if the stated call features have not been defeased.
There are many municipal bonds that provide excellent security without confining yourself to escrowed bonds, which offer a limited return on your investment dollars.
One of the few times we suggest a client sells his bonds is if they become pre-refunded.
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This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.