Pre-funded bond,
Definition of Pre-funded bond:
A government-issued bond, typically municipal, which is backed by US-government securities, placed in escrow. Such a bond is generally considered lower-risk than would be a straight municipal bond.
A pre-funded bond is a municipal bond backed by Treasury securities deposited in an escrow account. Pre-funded bonds are issued by municipalities that wish to attain a higher credit rating for their debt. Since state-issued bonds are not pledged by the full faith of the U.S government, the underlying collateral minimizes the risk of default.
The credit quality of a bond is determined by the level of risk the bond is perceived to have. A lower risk bond will have a higher credit quality and, thus, a higher credit rating than a higher risk bond. Investors are more drawn to higher rated bonds given that these bonds have a lower risk of default. To incentivize lenders and investors to purchase a bond issuer, a municipality may issue pre-funded bonds.
Meaning of Pre-funded bond & Pre-funded bond Definition
