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.

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.