The term bond arbitrage denotes the practice of assessing a higher-rate bond before its telephone with a decrease speed security. Issuing arbitrage bonds is a powerful way when interest rates have been decreasing.
Also called civil bond arbitrage, an arbitrage bond is the one which is issued to benefit from decreasing rates of interest and bond returns. That is attained by re financing at a greater speed security in front of its telephone with a reduce interest bond. In doing this, that the municipality reduces their cost . Once issued, the profits from the decreased rate of interest bonds are typically moved to a secure investment such as Treasury securities before the call of their bonds that are original.
The skill to decrease the effective cost to invest would be sensitive to interest prices. As an instance, the coupon rate of those newly issued bonds have to be somewhat lower compared to first security. Otherwise, the charge to issue that the newest bonds might be more than the savings achieved with the re financing procedure.