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arbitrage bond

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Arbitrage Bond
A lower-rate debt security issued by a municipality prior to the call date of the municipality's existing higher-rate security.

Notes:
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.


arbitrage bond
A municipal bond issued for the purpose of investing the proceeds in securities with higher yields than those paid by the municipal bond. Generally, the arbitrage involves purchasing U.S. Treasury bonds that are used to prerefund an outstanding issue prior to the outstanding issue's call date.

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