Municipal bonds must meet specific Treasury rules to remain tax-exempt. One major rule is that no tax-exempt bond financing may make the issuer money. If the issuer was to profit from a bond financing, the profit would be called arbitrage. Issuers hire arbitrage rebate consultants to make sure they remain in compliance with Internal Revenue Service arbitrage regulations, specifically Section 148 of the Internal Revenue Code of 1986. This IRS regulation requires issuers to return any interest earning above the arbitrage rate of the bonds to the Treasury.
The Treasury defines the arbitrage rate as the bond's borrowing rate. Arbitrage happens when issuers invest bond proceeds at a higher yield than the arbitrage rate. Municipal issuers making money from arbitrage on bond issuances must rebate the arbitrage earnings to the federal government.
Example:
Arbitrage rebate consultants specialize in arbitrage rebate computations, which may include analyzing legal documents and investment transactions to guarantee arbitrage rebate compliance. Firms may also help with Internal Revenue Service (IRS) inquiries and guidance on paying liabilities. A lease can be for any term, but a lease must have a term over a definite period of time with a particular starting and ending date.
What’s important here?
The arbitrage rebate consultant's job is to review all the cash flows of the bond transaction and verify that the earnings are below the arbitrage rate. Any interest or value earned above the arbitrage rate requires a payment to the federal government — called a rebate payment. The arbitrage calculation is required once every five years or when all the bond proceeds are spent, and upon maturity.
