What is a Defeased Bond? A Clear Overview

When dealing with investments, understanding the concept of a defeased bond is essential for both investors and financial professionals.

A defeased bond is a bond that has been rendered essentially risk-free. This is done by setting aside sufficient assets in a trust to cover all future payments of principal and interest. This ensures that bondholders will receive their promised payments, even if the issuer faces financial difficulties.

Defeasance, the process behind this, plays a crucial role in securing securities against potential risks.

The assets, often Treasury bonds, are placed into a trust. This trust generates cash flows matching those required to service the original bond. By doing so, the issuer is relieved of the obligation to carry the defeased bond on their balance sheet. This increases financial transparency and security.

Exploring defeased securities, the technicalities of defeasance, and its impact on bondholders offers insight into the strategic financial planning that underpins municipal bonds and various borrowing practices.