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.
Start here.
Do you have specific criteria for bonds you’re looking for? Let us know and we’ll e-mail you bonds that fit your needs. There is no charge for this service.
The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.