A municipality issues new bonds at a lower interest rate and uses the proceeds to retire outstanding higher-rate bonds. This process is known as:

Why A — Advance refunding

Advance refunding occurs when a municipality issues new bonds before the call date of existing bonds and uses the proceeds to purchase government securities that are placed in escrow. The escrowed securities generate income to pay debt service on the old bonds until they can be called. This allows the municipality to lock in lower interest rates even before the old bonds become callable. The escrowed bonds are considered pre-refunded and often receive AAA ratings.