Q & A
What is Arbitrage?
As demonstrated in the graphs above, Arbitrage is the spread between the tax-exempt borrowing rate and taxable earnings rate. When taxable investments generate a yield in excess of tax-exempt borrowing rate, the dollar value of the difference is paid back to the IRS as a Rebate.
Why do the Arbitrage Rules Exist? What if I don't Comply?
Tax-Exempt borrowing is a privilege from the federal government. As such, the government does not want its generosity to be abused. The arbitrage rules are designed to remove borrower incentive to –
Issue more bonds than necessary
Issue bonds earlier than necessary
Have bonds outstanding longer than necessary
If non-compliant, bonds may be declared taxable retroactively, or the IRS may seek settlement.
When do Arbitrage Rebate Calculations need to be Done?
IRS Filing Dates
Every 5th Bond Year
The Bond Year for arbitrage purposes may be the anniversary of the issue or other selected date. Check the Tax Certificate, as it may be selected prior to closing.
Final Redemption – Including Early Call or Reissuance
If Bonds are refinanced, final maturity may change from the scheduled date to a call date. An IRS filing calculation is needed immediately to confirm compliance of the refinanced issue.