Negative Arbitrage

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DEFINITION of 'Negative Arbitrage'

The opportunity lost when municipal bond issuers assume proceeds from debt offerings and then invest that money for a period of time (ideally in a safe investment vehicle) until the money is used to fund a project, or to repay investors. The lost opportunity occurs when the money is reinvested and the debt issuer earns a rate or return that is lower than what must actually be paid back to the debt holders.

INVESTOPEDIA EXPLAINS 'Negative Arbitrage'

As an example, XYZ issuer distributes $50 million in municipal bonds paying 6%. The issuer takes in this money, and then invests it at 4.2% for a period of one year, because the prevailing market will not pay a higher rate. The issuer has lost the equivalent of 1.8% interest that it could have earned or retained.

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RELATED FAQS
  1. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
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    A company should consider issuing a corporate bond versus issuing stock after it has already exhausted all internal forms ... Read Full Answer >>
  3. How is a corporate bond taxed?

    A corporate bond is taxed through the interest earned on the bond, through capital gains or losses earned in the early sale ... Read Full Answer >>
  4. How does arbitrage affect the price of exchange traded funds (ETFs)?

    Arbitrage may be used to bring the market value of an exchange-traded fund (ETF) back into line with the net asset value ... Read Full Answer >>
  5. How do I use the principles of convexity to compare bonds?

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