What are prerefunded bonds backed by?

Prerefunded bonds are a type of municipal bond that has been refinanced by the issuer. When a bond is prerefunded, the issuer uses proceeds from a new bond sale to purchase U.S. Treasury obligations. These obligations are then held in trust until the original, higher-interest bonds mature or are called. The purpose of prerefunding is to take advantage of lower interest rates and reduce the overall cost of borrowing.

By backing prerefunded bonds with U.S. Treasury obligations, the bonds become lower risk for investors, as U.S. Treasury securities are considered to be among the safest investments. This backing ensures that there will be enough funds available to meet the payment obligations of the prerefunded bonds, providing additional security and stability for investors. The strength of the backing helps to maintain the credit quality and attractiveness of these bonds in the market.