The bond market is one of the more popular investment mediums because bonds are safer than the usual stocks or foreign exchange. Now, one of the not so common types of bonds are known as the arbitrage bonds which are similar to regular municipal bonds. Before investing though, it is important to understand how it works.
As defined by most financial or wall street dictionary, this type of bond is a type of municipal bond that is offered at a lower interest rate than other municipal bonds. Now, one may think that a bond offered at a lower interest rate is not such an attractive bond, however, this will depend on the context. For this type of medium, it is usually used to pay for an earlier bond that is outstanding.
Actually, the reason as to why it is usually offered at a lower rate would be because it is simply a follow up bond when the existing offers are already finished. This is done by the municipalities who want to arbitrage the difference of this security and the existing bond that has a higher yield. With that, the municipality can take advantage of price differences between the two.
Of course, this does not really explain how the investors may be able to benefit hugely from the bond. Well, even in a very conservative bond market, there is a chance for bond interest rates to go down even before the bond reaches its maturity period. So in order to cover up that opportunity loss, municipalities would offer somewhat like a follow up bond in the form of an arbitrage bond which will allow the investors to have more leverage.
One can actually say that this is somewhat of an added benefit or leverage in the event that the bond market does not do as well as expected to be. This is especially attractive in these situations and also beneficial for municipalities who are looking for more funds to build more and better community projects that can benefit the municipality. With that, the investors can have a bigger safety net and the municipality can have a chance to get more funds into their treasury.
Another great thing about this bond is that it is tax exempt. This means that if one buys it, then there are no tax deductions in the earnings made by investors. In the long run, one can make a lot of money because of no taxes.
Do take note though that there is a condition to making this bond tax exempt. The bond will only be tax exempt if the money raised is for the purpose of a community project. The governments are rather strict about these cases and will really look into the flow of money before giving it a tax exempt status.
Basically, those are some of the things that one should know about if he or she wants to invest in an arbitrage bond. Now, these types of bonds are actually rather attractive because they offer an extra benefit and some extra profits to the investor. At the same time, the government gets to earn the difference between higher yielding securities as well which is a win win for both parties.
As defined by most financial or wall street dictionary, this type of bond is a type of municipal bond that is offered at a lower interest rate than other municipal bonds. Now, one may think that a bond offered at a lower interest rate is not such an attractive bond, however, this will depend on the context. For this type of medium, it is usually used to pay for an earlier bond that is outstanding.
Actually, the reason as to why it is usually offered at a lower rate would be because it is simply a follow up bond when the existing offers are already finished. This is done by the municipalities who want to arbitrage the difference of this security and the existing bond that has a higher yield. With that, the municipality can take advantage of price differences between the two.
Of course, this does not really explain how the investors may be able to benefit hugely from the bond. Well, even in a very conservative bond market, there is a chance for bond interest rates to go down even before the bond reaches its maturity period. So in order to cover up that opportunity loss, municipalities would offer somewhat like a follow up bond in the form of an arbitrage bond which will allow the investors to have more leverage.
One can actually say that this is somewhat of an added benefit or leverage in the event that the bond market does not do as well as expected to be. This is especially attractive in these situations and also beneficial for municipalities who are looking for more funds to build more and better community projects that can benefit the municipality. With that, the investors can have a bigger safety net and the municipality can have a chance to get more funds into their treasury.
Another great thing about this bond is that it is tax exempt. This means that if one buys it, then there are no tax deductions in the earnings made by investors. In the long run, one can make a lot of money because of no taxes.
Do take note though that there is a condition to making this bond tax exempt. The bond will only be tax exempt if the money raised is for the purpose of a community project. The governments are rather strict about these cases and will really look into the flow of money before giving it a tax exempt status.
Basically, those are some of the things that one should know about if he or she wants to invest in an arbitrage bond. Now, these types of bonds are actually rather attractive because they offer an extra benefit and some extra profits to the investor. At the same time, the government gets to earn the difference between higher yielding securities as well which is a win win for both parties.
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