Negative Arbitrage

AAA

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.

RELATED TERMS
  1. Offering

    The issue or sale of a security by a company. It is often used ...
  2. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies ...
  4. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  5. Risk Arbitrage

    A broad definition for three types of arbitrage that contain ...
  6. Arbitrageur

    A type of investor who attempts to profit from price inefficiencies ...
Related Articles
  1. Trading The Odds With Arbitrage
    Options & Futures

    Trading The Odds With Arbitrage

  2. Put-Call Parity And Arbitrage Opportunity
    Options & Futures

    Put-Call Parity And Arbitrage Opportunity

  3. What is arbitrage?
    Forex

    What is arbitrage?

  4. How The Retail Investor Profits From ...
    Trading Strategies

    How The Retail Investor Profits From ...

comments powered by Disqus
Hot Definitions
  1. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  2. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  5. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  6. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
Trading Center