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Defeasance

• See Advanced Refunding.

• Practice whereby the borrower sets aside cash or bonds sufficient to service the borrower's debt. Both the borrower's debt and the off setting cash or bonds are removed from the balance sheet.

 
 Embedded terms in definition
 Advanced refunding
Balance sheet
Cash
Debt
Refunding
 
 Referenced Terms
 Advanced refunding: Is the technique of replacing one bond issue by another. This typically occurs when a municipality can borrow at more favorable terms than the outstanding issue. The new issue's proceeds are used to purchase government obligations which are held in escrow. The income and/or appreciation of these government securities is then used to service the outstanding debt. The escrow may be held until the first call date or maturity of the initial bond issue. If the escrowed funds retire the original issue at the first call date then the issue is pre-refunded. This retirement and replacement process of debt is also known as Defeasance.

 Economic defeasance: See: in-substance Defeasance.

 In substance defeasance: Defeasance whereby debt is removed from the balance sheet but not cancelled.

 Novation: Defeasance whereby the firm's debt is canceled.

 
 Related Terms
 Economic defeasance
In substance defeasance
Legal defeasance

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