Arbitrage refers to the practice of earning investment income on investments made with the proceeds of bonds that are exempt from federal taxes, where the investment income exceeds the interest on the bonds. This is typically done by borrowing at a lower rate than the rate of return on the investments made with the borrowed funds. This practice is legal, but subject to certain regulations and limitations. Option A, C, and D are incorrect definitions of other unrelated terms.

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Arbitrage Is

Question 32

Multiple Choice

Arbitrage is:

A) a means of settling tax disputes between professional athletes and the governmental unit.
B) earning investment income on investment of the proceeds of bonds exempt from federal taxes that exceeds the interest on the bonds.
C) the amount of tax plus interest paid by governments on the total of the excess of revenues and other financing sources over expenditures and other financing uses in the governmental funds and operating income in the proprietary funds.
D) a payment in lieu of tax from the federal government to a local government for some services provided to the federal government by the local government.

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