Arbitrage Bond

  

Categories: Bonds, Investing, Trading

Nowhereland, Kansas, issued a three-year municipal bond in 2017 to raise funds to build a supersonic highway. It’s now 2019, and interest rates are dropping like it’s hot. You bet your bottom dollar they’re going to take that and run with it. They’ll issue a new muni at the lower interest rate to bring cash in, and then call the higher rate bond on the call date.

In the meantime, funds generated by the lower rate bond will be parked in treasuries to make a profit. Hence the awesomeness of arbitrage, making money from a change in going rates. Cha-ching.

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