The Bottom Line For this reason, arbitrage is not only legal in the United States (and most developed countries), but also beneficial to the markets as a whole and conducive towards overall market efficiency.
Positive arbitrage, sometimes described as an arbitrage profit, arises when the borrower invests the proceeds of a tax-exempt obligation (such as a bond, a bond anticipation note, or a lease) in investments that have a yield above the tax-exempt obligation yield (“Higher Yielding Investments”).
Bond issuers enter into a negative arbitrage when coupon payments on their bonds are higher than the returns they receive from parking or using the proceeds of a bond typically while they wait for the project – which can be anything from an infrastructure project to a housing development – that is scheduled to be ...