What is Deposited for repayment
Escrowed to maturity securities refer to the form of pre-financing of municipal bonds. In this case, the proceeds from the new bond issue are held in an escrow account, and invested in high credit securities to Finance the interest and principal payments to the original owner.
Breaking down the ‘Escrowed to maturity
Preservation at maturity describes how to use the new sales—invested bonds and held in an escrow account to cover obligations to the holders of previously issued bonds.
Pre-financing of municipal bonds, which include escrowed to maturity bonds, securities that the Issuer called, or redeemed, from the bonds before it is ripe. Issuers often make calls in periods of falling interest rates—to pay off their high interest debt, the Issuer can sell new bonds at lower interest rates. However, most of the notes contain provisions that prevent the Issuer from calling before a certain date—usually a few years after they were released. So if an Issuer wants to take advantage of lower prices before this date call, they can use the pre-financing bonds.
Here, the Issuer is using the sale of new bonds to cover the cost of the call those bonds that they have already made. When the date of the original bond can be called is reached, the proceeds from the sale of new bonds are used to pay for their owners. In this particular case, the income from the distribution of the new bonds are invested in U.S. Treasury bonds and on the escrow account. Selecting treasuries that Mature at the same time that a call will be made on the original bond, the Issuer may repay the principal and full interest owed for repayments on the bonds the initial bonds.
The potential benefits Deposited bonds to maturity,
Escrowed to maturity bonds are unique in that they have tax advantages for the treatment of municipal bonds relative safety, issued by the state security. The result is potentially better after tax return than the investor will receive on bonds of similar duration and risk.
Say for example you choose between two-year Treasury and municipal bonds (with original maturity of 10 years), escrow to maturity in two. Not only is it likely that municipal bonds are called offer superior yield to the Treasury, but the interest that it generates protected by state and Federal taxes.