"Defeasance" is a term used by bond issuers that deals with the concept of setting aside enough money to pay off a bond. Companies can set aside cash equal to the amount of money that they owe bondholders. A company can hold this money in a separate account, and then the interest payments that are due bondholders will be paid out of this account. 

When a company sets aside enough money to service its debts, the debt and the assets offset each other. Because of this, the company no longer has to list the bond debt on its balance sheet. 

Using defeasance provides a business with some benefits. Instead of simply paying off the debt with the cash, it can hang onto the cash in a separate account. This allows the company to keep the debt at a reasonable interest rate and also keep the cash on hand. This way, if the company ever goes through tough business conditions, it still has the cash on hand and does not have to go into debt again to get it. The company will still be able to begin repaying the bond with other money and use the cash for its needs.

blog comments powered by Disqus