arbitrage bond

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.

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.
References in periodicals archive ?
First, it must be determined whether an "artifice or device" is employed in connection with the issuance of the obligation, thus making the bond an arbitrage bond. Income earned on an arbitrage bond is not exempt from tax.
A bond may also be classified as an arbitrage bond if the issuer intentionally uses any portion of the proceeds of the issue f or these purposes.
Code Section 148 begins by explaining the meaning of "arbitrage bonds." Code Section 148(a) defines an arbitrage bond as "any bond issued as part of an issue a portion of the proceeds of which are reasonably expected ...
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.
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.
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.