Final answer:
To achieve in-substance defeasance of bonds, the government places cash or other assets, often in the form of low-risk government bonds, into a trust to guarantee all future payments on the debt.
Step-by-step explanation:
For in-substance defeasance of bonds, the government must place cash or other assets in a trust sufficient to pay all future interest and principal payments for the debt being defeased. This action ensures that even though the issuing entity remains legally responsible for the debt, the risk of default is essentially removed. The assets placed in trust are usually highly-rated bonds or government issues, which are low-risk securities that the government is virtually certain to pay off. These government bonds are an important asset for banks, just like loans, because they generate a stream of future payments, augmenting the stability of banks' financial positions. This practice reflects the security and predictability of government issues, which, in our example, represent a total bond value of $4 million for the Safe and Secure Bank.