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Arbitrage Bond
What Does Arbitrage Bond Mean? A lower-rate debt security issued by a municipality prior to the call date of the municipality's existing higher-rate security.
Investopedia explains Arbitrage Bond Proceeds from the issuance of lower-rate bonds are invested in treasuries until the call date of the higher-interest bonds. This strategy is used by municipalities when they wish to gain an interest-rate advantage. As long as the proceeds from net sales and investments are to be used in future projects, the bonds will qualify for a temporary tax exemption. If, however, the project experiences a significant delay or cancellation, the municipality may be taxed. Some conflicts in federal regulations can be avoided by using a ZEBRA agreement.
Related Links
- Advanced Bond Concepts - Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
- Bond Basics Tutorial - Investing in bonds - What are they, and do they belong in your portfolio?
- Trading the Odds with Arbitrage - Profiting from arbitrage is not only for market makers--retail traders can find opportunity in risk arbitrage.
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