What is one purpose of refunding bonds?

Refunding bonds are primarily issued to restructure existing debt obligations in a way that reduces interest costs for the issuer. When a government or organization issues refunding bonds, it typically uses the proceeds from these bonds to pay off its older, higher-interest debt. This can lead to significant savings in interest payments over time since the new bonds may carry a lower interest rate due to prevailing market conditions.

In this context, the purpose of refunding bonds aligns closely with financial strategy; it allows the issuer to take advantage of lower interest rates or improved credit ratings that have emerged since the original bonds were issued. By replacing older debt with new bonds that have more favorable terms, the issuer can more effectively manage its debt service obligations and improve its overall financial position.

This approach directly contrasts with options concerning increasing total debt, eliminating the need for underwriters, or imposing additional covenants, which do not align with the primary intent and benefits of refunding bonds.