Harbor City issued 6 percent tax-exempt bonds and used the proceeds to acquire federal government securities yielding 7 percent. After paying the interest on the tax-exempt bonds, the city cleared 1 percent. This is an example of

Question

Quizplus · Accepted Answer

This is an example of arbitrage, where the city is profiting from the difference in interest rates between the tax-exempt bonds it issued and the higher-yielding federal government securities it purchased.

Harbor City Issued 6 Percent Tax-Exempt Bonds and Used the Proceeds