Particular type of transaction that most day traders love our arbitrage deals. Arbitrage investments are very popular among day traders because they are considered risk free. They are an easy and fast way to make a profit on their investments. Because they have a quick turnaround it does not require and investor to hold onto a stock for months or years in order to see a profit come out of them. On the surface, it seems like the hardest part about investing in an arbitrage deal is simply finding the discrepancy in the pricing on the stock market in the first place. However, just like with all other investments it is important to make sure that you are in arbitrage compliance if you are using bonds in an arbitrage manner. As with every other investment, the government requires their fair portion of that investment which means that in many cases you may have an arbitration rebate owed to the government. The process of calculating the arbitrage rebate can be tricky and complex, which is why most companies rely on an arbitrage compliance Company to do those calculations for them.
In many cases in arbitrage, an investor purchases is a tax exempt bond and then simultaneously sells that exact bond at a higher price. In some cases they may use the bonds to invest into a different bond that is taxable. When you get this crossover between tax-exempt and taxable bonds is when you will start to see arbitrage rebates come into the picture.
And arbitrage rebate is essentially a payment that is made to the federal government. Think of it like change taxes, but on bonds that are technically tax exempt. The bond may have been tax exempt when the investor initially bought it, but the process of investing it in a taxable bond means that you will now owe a rebate on the profits that you made from it.
Looking at an arbitrage rebate at its most basic level, the rebate is the amount of money that she would pay to the government from your profits. The amount is going to be the same as any extra profit that you made off of a tax exempt bond that you turned around and invested in a taxable bond. So if you continually make money in the arbitrage market from non-taxable bonds and then use that money that you make to invest in other aspects of the stock market, then you are likely going to owe a large rebate to the government.
This is why most people use Arbitrage Compliance Specialists to perform the calculations of their rebate for them. It can be tricky to tell how much of a non-taxable bond profit was then reinvested into a taxable bond on the stock market. Part of figuring this out also depends on when a bond was purchased and when that same bond matured. It is typical that arbitrage rebate calculations need to be done and paid out approximately every five years.