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. Fixed-Income Arbitrage

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

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

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

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

    A type of investor who attempts to profit from price inefficiencies ...
  6. Offering

    The issue or sale of a security by a company. It is often used ...
Related Articles
  1. Options & Futures

    Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.
  2. Options & Futures

    Put-Call Parity And Arbitrage Opportunity

    Look at trades that are profitable when the value of corresponding puts and calls diverge.
  3. Forex

    What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. This is considered riskless profit for the investor/trader. Here is an ...
  4. Promising high yields that the Eurozone and U.S. can't match, West African sovereign debt has caught the attention of savvy investors.
    Bonds & Fixed Income

    Interested In West African Debt? Look Here First

    Promising high yields that the Eurozone and U.S. can't match, West African sovereign debt has caught the attention of savvy investors.
  5. Mutual Funds & ETFs

    How do hedge funds determine what assets to own?

    Learn about the various types of investments that hedge fund managers use, and explore basic hedge fund management trading strategies.
  6. Options & Futures

    Writing Covered Calls On ETFs

    The strategy of writing covered calls on ETFs can limit your losses and hedge risk, but they cap your upside potential.
  7. Bonds & Fixed Income

    What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields move in opposite directions.
  8. Bonds & Fixed Income

    How long will it take for a bond to reach its face value?

    Learn when different savings bonds reach face value, and determine the best time to cash them in to get the highest return on your money.
  9. Bonds & Fixed Income

    How long can I hold my HH/H Bonds and still earn interest?

    Take advantage of your bond investment and learn how long you can hold on to your Series H/HH Bonds and still earn interest and receive interest payments.
  10. Taxes

    Why should I keep records on my tax-exempt bond transactions?

    Keep your purchase records on all investments, including tax-exempt bonds. Though the interest is tax-free, you may owe taxes if you sell your bond for a gain.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center