Definition of "Defeasance Bonds"

A process whereby a corporation gets rid of old, low-rate debt without paying it back before maturity--another term for "advance refunded bonds." The corporation uses newly purchased bonds that have a lower face value and pay higher interest or have a higher market value. In doing this, the corporation's balance sheet becomes more debt free and earnings will increase by the amount that the old debt's face value exceeds the cost of the new debt. Another type of defeasance occurs when a corporation solicits a brokerage firm to buy the outstanding bonds of the old corporate debt issue. The brokerage firm will then exchange the old debt issue for a new corporate stock issue equal to the market value of the old debt. The broker will then sell the stock at a profit.