A process in which whereby an issuer floats a second bond issue and uses those proceeds to escrow a sufficient amount of U.S. Treasuries to ensure that a call date and price can be met is called:

Question

Options

• Apost-refunding
• Bpartial-payment
• Cpre-refunding
• Dfull-payment

• A
  7% (2)
• B
  14% (4)
• C
  75% (21)
• D
  4% (1)

Explanation

Pre-refunding (C) is correct because the process happens before the existing bond's call date - the issuer floats a new bond, then parks the proceeds in escrowed U.S. Treasuries that will mature at exactly the right time to fund the call. The old bonds remain outstanding but are effectively defeased, backed by the Treasuries rather than the issuer's credit.

Post-refunding (A) is a plausible-sounding distractor but describes refunding that occurs after the call date has passed - it's essentially a made-up variation on the correct term. Partial-payment (B) and full-payment (D) are not recognized bond terminology for this type of transaction; they describe payment structures, not refunding mechanisms.

Memory tip: Think of the prefix - "pre" means before. The issuer pre-funds the future call by setting up the escrow in advance, so the money is ready and waiting when the call date arrives.

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