Arbitrage bonds

Arbitrage bonds

Municipality issued bonds issued intended to gain an interest rate advantage by refunding a higher-rate bond in ahead of their call date. Lower-rate refunding issue proceeds are invested in Treasuries until the first call date of the higher-rate issue.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
Topics include LGIPs, arbitrage bonds, qualified tuition plans and the regulation of political contributions.
Code Section 103(b), however, revokes the exclusion if the bonds are determined to be either arbitrage bonds (not the subject of this article) or "any private activity bond which is not a qualified bond." Code Section 141 defines a "private activity bond."
This provision, which is in section 103 of the Internal Revenue Code of 1986, currently disallows the application of this general exclusion for "private activity bonds" that are not "qualified bonds," and for "arbitrage bonds."
The interest exclusion for arbitrage bonds, which are bonds whose proceeds are used to acquire higher-yielding investments, was initially eliminated in 1969 [2].
Treasury, the tax-exempt bonds are so-called arbitrage bonds, and the federal tax law provides that interest earned on those bonds is not exempt.
Tax Court ruled for the city that bonds it had proposed to issue in 1993 are not arbitrage bonds as the Internal Revenue Service has argued.
The IRS responded, saying the bonds would be arbitrage bonds and therefore taxable.
148, relating to arbitrage bonds and the rebate of permissible arbitrage to the United States.
Proceeds can be invested in certain instruments to avoid classification as arbitrage bonds: * SLGS: State and local government series bonds issued by the Treasury Department to enable issuers to yield restrict their investments and avoid earning arbitrage profits.
Code Section 103(b), however, revokes the exclusion if the bonds are determined to be either private activity bonds (not the subject of this article) or arbitrage bonds.
Moreover, issuers that choose not to enter closing agreements may be subject to IRS enforcement action and, thus, run the risk that their advance refunding bonds will be declared taxable arbitrage bonds. Revocation [TABULAR DATA FOR EXHIBIT 1 OMITTED] of tax exemption would, in turn, expose public agencies to even greater potential liabilities to bondholders.
The Internal Revenue Service (IRS) characterizes such bonds as taxable arbitrage bonds because the implicit interest rate on the annuity contract is considered to exceed the yield on the bonds.