What does the term "defeasance" refer to in the context of bonds?

Defeasance in the context of bonds specifically refers to the action of redeeming or refunding bonds before their scheduled maturity date. This process is often undertaken by municipalities or other bond issuers as a strategy to manage debt, which can involve putting aside funds in a trust, specifically earmarked for the payment of principal and interest. This effectively removes or "defeases" the bonds from the issuer's balance sheet, allowing them to reduce their long-term liabilities and financial obligations.

In this scenario, bond issuers may choose to do so in order to take advantage of lower interest rates or to restructure their debt portfolio more favorably. Defeasance can provide significant benefits in terms of cash flow management and overall financial strategy, making it a crucial concept in bond financing and capital management.

This definition aligns clearly with choice B, highlighting the process of early redemption or refunding. It’s important to understand that while other options may relate to bond transactions—such as issuing new bonds or changing interest rates—they do not capture the specific meaning of defeasance as it pertains to early redemption of existing bonds.