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.
It may be a bit hard to understand at first, but it will be easier once it is broken down. Now, these types of securities are usually offered by municipalities who want to earn the difference between a lower interest rate and an existing bond with a higher rate that is already outstanding. This is why they offer these types of securities in the first place.
While it may seem pretty advantageous to the municipalities, it does not seem to benefit the investors that much. Well, the advantage would usually come when the existing bond plummets and has a lower rate than previously established. In that case, the new offering would then add a little more value for the investor and somehow cover up the opportunity cost that the investor had.
That is actually the main benefit of this kind of security for investors. In the event that the bond market would plummet, then this follow up security can help as a buffer to at least cover some of the loss that the investors may encounter when the bond rate would go down. Since this also raises money for more municipality projects, then the municipality would also highly benefit from it.
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.
It may be a bit hard to understand at first, but it will be easier once it is broken down. Now, these types of securities are usually offered by municipalities who want to earn the difference between a lower interest rate and an existing bond with a higher rate that is already outstanding. This is why they offer these types of securities in the first place.
While it may seem pretty advantageous to the municipalities, it does not seem to benefit the investors that much. Well, the advantage would usually come when the existing bond plummets and has a lower rate than previously established. In that case, the new offering would then add a little more value for the investor and somehow cover up the opportunity cost that the investor had.
That is actually the main benefit of this kind of security for investors. In the event that the bond market would plummet, then this follow up security can help as a buffer to at least cover some of the loss that the investors may encounter when the bond rate would go down. Since this also raises money for more municipality projects, then the municipality would also highly benefit from it.
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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