Glossary of Municipal Securities Terms

ARBITRAGE

(1) With respect to the issuance of municipal securities, arbitrage usually refers to the difference between the interest paid on tax-exempt bonds and the interest earned by investing the proceeds of the tax-exempt bonds in higher-yielding taxable securities. Federal income tax laws generally restrict the ability to earn arbitrage in connection with tax-exempt bonds or other federally tax-advantaged bonds. See: ARBITRAGE REBATE; ARBITRAGE REBATE FUND; DIRECT PAY SUBSIDY BONDS; TAX CREDIT BONDS; TAX-EXEMPT BONDS; YIELD REDUCTION PAYMENT; YIELD RESTRICTION.

(2) Generally, transactions by which securities are bought and sold in different markets at the same time for the sake of the profit arising from a difference in prices in the two markets. 

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