ArbitrageBy Erik Hatch

Arbitrage any bond issued to be used directly or indirectly

to acquire higher yielding investments, or to replace funds which were used directly or

indirectly to acquire higher yielding investments higher yielding investments means any investment

which produces a yield that is materially higher than the bond

Amount Legally Allowable Allowed if used for a reserve or repayment fund

Limited to 10% of the proceeds of the bond issue Allowed if amount invested is the lesser of

5% of the bond proceeds, or $100,000

Allowed if short term 3 months if used for loan repayments 6 months if used to finance loans 2 years if the loan is for construction

Penalties All proceeds in excess of the issue bond

Will be rebated to the Federal government Payments are required

Every 5 years Must be 90% of the excess proceeds Final payment is due 60 days after the bond is paid off

Accounting for Arbitrage GASB has no pronouncements on how to account

for Arbitrage Difficult to value the payments

No annual amounts Taxes would be expenditures in funds

Expenses in Government Wide Statements Interest payments would be interest revenue

Example

Sources http://www.irs.gov/pub/irs-tege/eotopicg99.pdf http://www.taxalmanac.org/index.php/Internal_Re

venue_Code:Sec._148._Arbitrage