What Is Government Bond Refunding ?
A bond when issued by a company or the government is nothing but a promise to pay money. If the issuer of the bond defaults in payment, then the investor can force the issuer to pay the money through a lawsuit. |
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When the government needs money, it can get it in two ways. One is that the government can print more money or it can offer bonds to different investors. Selling bonds to investors is ideal for the government.
The bonds are issued in different denominations, but the most common are $500 and $1,000. However, at times the denomination can also be $5,000. In certain instances, when the government is targeting the masses, it can make bonds available in low denominations of $100 or even less than that.
The money raised through bonds is then put to use to improve or build different types of infrastructure in the country like roads, hospitals and schools.
Now that we know what bonds are, let us look at what is government bond refunding.
Sometimes, the government recalls the old bonds which have either reached their maturity date or have been called. Once these bonds are recalled, the government issues new bonds in lieu. This is primarily done to benefit from the low interest rate. And, this is what is known as government bond refunding.
Once the money comes in from refunding bonds, it is used to purchase different types of securities, which are actually kept in an escrow account. The account then earns interests and the proceeds are more than sufficient to pay the principal amount, interest, and call the rest of the bonds.
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