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Arbitrage Bond

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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.
Arbitrage Bond
A municipal bond issued at a lower interest rate than another municipal bond. The funds from the second bond are invested in treasury securities until the call date of the first bond, when they are used to pay for the first bond's redemption. Depending on whether an arbitrage bond is also used for projects relating to municipal development, it may or may not be tax free.


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