Municipal bond arbitrage involves developing a leveraged portfolio of municipal bonds with tax exempt and subsequently evading its duration risk. The evasion is performed through the process of selling equivalent taxable corporate bonds with the same maturity period by swapping interest rates. If you believe you have been involved in such an investment procedure and would like legal counsel, seek our attorneys at Weltz Law.
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The main aim of the municipal bond arbitrage strategy is to minimize credit and duration risk using municipal bonds and swapping of interest rates with similar maturity and quality. The implicit assumption of this strategy is that the municipal bonds and the interest rate swaps will continue to be closely linked.
However, since municipal bonds are tax-exempt, an arbitrageur can receive after-tax payout from the municipal bond portfolio which is more than the paid interests during the process of swapping interest rates. This strategy is attractive to some investors with high income tax brackets who will get to enjoy zero to little negative cash flow.
A high percentage of investors views fixed-income investment to preserve capital. However, there are still ways which may lead to a loss in terms of both real return and literal return such as the following:
Municipal bonds are generally sound investments for those keen on keeping their taxes and risks low. However, municipal bonds may not be suitable for every investor. Some of the pros and cons to be considered before choosing municipal bond investments include:
The credit rating of the average municipal bonds is relatively higher, but a default cannot be ruled out entirely.
If you believe your investment has caused you to suffer losses and you need to get out of the contract to sustain your financial needs, seek legal advice from Weltz Law. We have a group of experienced attorneys who is prepared to work on your case.
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