Where are proceeds of refunding bonds typically placed?

Refunding bonds are issued to pay off or refinance existing debt, often to take advantage of lower interest rates or to restructure financial obligations. The proceeds from these bonds are typically placed in an escrow account held by a third-party escrow agent. This arrangement ensures that the funds are managed responsibly and can only be used for the specific purpose of repaying the bonds being refinanced.

The escrow account is essential because it provides a secure and controlled environment where the proceeds are kept until they are needed to service the existing debt. By utilizing a third-party escrow agent, the process is more transparent, reducing the risk of mismanagement or misuse of the funds. This helps maintain the integrity of the refunding process and instills confidence among bondholders.

In contrast, options such as placing proceeds in a direct investment account or in an interest-bearing checking account may not provide the same level of oversight and control needed for managing the funds intended for bond repayment. A reserve fund managed by the issuer could be used for other financial obligations and does not guarantee that the funds will solely serve the purpose of refunding the existing debt, leading to potential complications in meeting those obligations.