How does an advance refunding differ from a current refunding?

Prepare for the CPFO Debt Management Exam. Study effectively with flashcards and multiple choice questions, complete with hints and detailed explanations. Get exam-ready!

The distinction between an advance refunding and a current refunding is primarily related to the timing of the bond redemption in relation to the existing bonds. An advance refunding occurs when a bond issuer decides to redeem its outstanding bonds before they mature, specifically more than 90 days before the call date or maturity date. This allows the issuer to take advantage of lower interest rates by issuing new bonds and using the proceeds to fund an escrow account, which will cover the payments on the old bonds until they can be called or mature.

In contrast, a current refunding refers to redeeming the bonds within 90 days of their scheduled maturity. Because the bonds are being refunded relatively close to their maturity, the implications and mechanics of the refunding differ.

The other choices do not accurately capture the critical timing aspect that distinguishes an advance refunding. By focusing on the timing of redemption, the correct answer highlights a key characteristic of advance refundings that is essential for understanding the mechanisms of bond management and strategies for debt cost reduction.

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