Sometimes an issuer desires to pay off a bond in order to remove the debt from its books. However, the bond may not be callable, and the issuer can not redeem the bonds at its discretion. In this case the issuer may deposit sufficient funds with a trustee into an escrow account so that the trustee can use the funds to pay all interest and principal as they come due.
An Advanced Refunded bond. When interest rates fall, an issuer may chose to sell a new issue called a refunding issue and use the proceeds of the second issue to pay off the original issue, much the same as a home owner refinancing a mortgage in an effort to save interest costs. The proceeds of the refunding issue are used to structure a portfolio of U.S. government securities, the principal and interest payments of which exactly match the principal and interest payments of the refunded bonds. The portfolio is placed in escrow at the paying agent and the bond issue is said to be fully defeased and escrowed to maturity. In actual practice the bonds are usually called on the first call date. Because of the U.S. Treasury backing, ETM bonds are considered the safest municipal bonds available.
