1. Arbitrage By Erik Hatch

2. 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

3. 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

4. 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

5. 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

6. Example

7. Sources  http://www.irs.gov/pub/irs-tege/eotopicg99.pdf http://www.irs.gov/pub/irs-tege/eotopicg99.pdf  http://www.taxalmanac.org/index.php/Internal_Re venue_Code:Sec._148._Arbitrage http://www.taxalmanac.org/index.php/Internal_Re venue_Code:Sec._148._Arbitrage