Business Glossary

municipal bond financing practice whereby underwriters in advance refunding ( prerefunding ) slap excessive markups on U.S. Treasury bonds bought and held in escrow to compensate investors during the time between issuance of the new bonds and repayment of the old ones. Since bond prices and yields move in opposite directions, when underwriters mark up the bonds, they "burn down" the yield, violating federal tax rules and costing the government tax revenues. Under IRS regulations, municipalities, not the underwriters, incur the tax liability. The SEC, which was conducting a wideranging probe of alleged yield-burning abuses by Wall Street firms in the late 1990s, favors making the underwriters responsible, not the municipalities.