Arbitrage Bonds

Section 148 of the Code and the Treasury Regulations promulgated thereunder restrict the Yield that can be earned on the investment of unspent proceeds of Tax-Exempt Bonds to a Yield not “materially higher” than the Yield on the Bonds, except during permitted Temporary Periods. Even where a materially higher Yield can be earned, these rules often require the positive Arbitrage to be paid to the federal government as Rebate. Tax-Exempt Bonds violating these requirements are called Arbitrage Bonds, and the Interest on such Bonds will be retroactively taxable for each bondholder for federal income tax purposes. In certain cases, the Issuer of the Bonds and/or the Borrower may agree to make payments to the Internal Revenue Service in return for the Internal Revenue Service not declaring the Interest on the Bonds retroactively Taxable for federal income tax purposes.

See Also


Profit from differences in markets. All tax-advantaged bonds are subject in one way or another to the arbitrage requirements, which are contained in Section 148 of the Code and the Treasury Regulations that go along with it.

Arbitrage Certificate

Certificate of a responsible officer of the Issuer and/or Borrower certifying compliance with the limitations on Arbitrage imposed on the Tax-Exempt Bonds by the Internal Revenue Code.

Temporary Period

The period of time (often set forth in the tax certificate), during which a particular category of proceeds may be invested in higher yielding investments without the issue being treated as arbitrage bonds under Section 148 of the Code.


A requirement imposed under the Code to pay to the Internal Revenue Service an amount equal to the arbitrage earned on tax-exempt bonds.

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A meeting of all the parties prior to the closing, often held the day before the closing.