Bond-Proceeds Reinvestment Glossary: Terms from Arbitrage Yield to Yield Restriction

This glossary defines the terms issuers and finance directors meet when investing bond proceeds, from arbitrage yield to yield restriction.

Final legal and tax conclusions on any term belong to bond counsel and tax counsel.

Arbitrage

Arbitrage is the margin earned by investing proceeds at yields above the bond yield.

IRS Publication 5271 tests bonds under two independent rule sets, yield restriction under section 148(a) and rebate under section 148(f), and failing either set makes them arbitrage bonds.

The arbitrage guide covers both.

Arbitrage bond

A bond is an arbitrage bond if proceeds are reasonably expected at issuance to buy higher yielding investments or replace funds so used, under 26 U.S.C. 148(a).

Intentional use of proceeds that way also makes the bond an arbitrage bond.

Section 103(b)(2) carves arbitrage bonds out of the federal interest exclusion.

The yield restriction guide explains the tests.

Arbitrage yield

The arbitrage yield is the yield on the issue itself, computed on issue price under the economic accrual method to at least four decimal places, under Regulation 1.148-4(a).

The arbitrage yield guide works through it.

Bid specifications

Bid specifications are the written terms an issuer sends to investment providers.

A bona fide solicitation under Regulation 1.148-5(d)(6)(iii)(A) requires written specifications sent to potential providers in time, including all material terms, meaning any term that may directly or indirectly affect the yield or cost of the investment, and only commercially reasonable terms.

For GIC purchases, the terms must also take into account the issuer's reasonably expected deposit and drawdown schedule, under Regulation 1.148-5(d)(6)(iii)(A)(5).

The bid specifications guide lists what belongs in the package.

Bidding Agent

A Bidding Agent runs a competitive investment solicitation for an issuer.

mGIC's Bidding Agent service develops bid specifications, solicits qualified providers, manages questions, receives bids and compares rate and non-rate terms.

Regulation 1.148-5(d)(6)(iii)(B)(3) requires that an agent used to conduct the bidding did not bid to provide the investment.

The Bidding Agent guide covers the role.

Bond counsel

Bond counsel delivers the opinion that the bonds are validly issued and, if intended, tax-exempt, per the MSRB glossary.

The financing team guide places the role.

Bond proceeds

Proceeds of municipal securities include sale proceeds, investment income and pledged funds such as reserves, under SEC Rule 15Ba1-1(m)(1).

They stop being proceeds when spent for the securities' authorized purposes.

The funds guide maps the separate funds.

Bona fide debt service fund

A bona fide debt service fund principally matches revenues to principal and interest each bond year and is depleted at least once per year, under Regulation 1.148-1(b).

Carryover is limited to a reasonable amount not exceeding the greater of the prior year's earnings on the fund or one-twelfth of its principal and interest.

The debt service fund guide covers the details.

Capitalized interest

Capitalized interest is proceeds set aside to pay interest for a period, often while a project is built, per the MSRB glossary.

The capitalized interest fund guide covers the fund.

Computation date

A computation date is a date as of which the rebate amount is measured and to which a payment relates.

A fixed-yield issue may treat any date as a computation date; after the first required payment date, a variable-yield issue must consistently use either the end of each bond year or the end of each fifth bond year, under Regulation 1.148-3(e).

The first rebate installment must be for a computation date no later than 5 years after the issue date and each later one no later than 5 years after the previous, each bringing cumulative payments at future value to at least 90% of the rebate amount, under Regulation 1.148-3(f).

The rebate calculation guide shows the mechanics.

Conduit issuer

In a conduit financing the issuer issues bonds to finance a project used mainly by a third party who is liable for the debt service, per the MSRB glossary.

Industrial development, multifamily housing and qualified 501(c)(3) bonds are common types.

The conduit sector guide covers these proceeds.

Construction fund

A construction fund holds proceeds waiting to be spent on the capital project.

Capital-project proceeds get a 3-year temporary period, under Regulation 1.148-2(e)(2)(i), only if the issuer reasonably expects to meet the expenditure test, the time test and the due diligence test.

The construction fund guide covers investing it.

Cost of issuance fund

A costs of issuance account holds funds pending payment of underwriter's discount and financial advisory, bond counsel, other counsel and rating fees, per the MSRB glossary.

The cost of issuance fund guide covers its short hold.

Debt service reserve fund

A debt service reserve fund pays debt service if pledged revenues fall short, often sized as a fixed percent of par or of maximum annual debt service, per the MSRB glossary.

The debt service reserve fund guide covers sizing and investment.

Defeasance

Defeasance deposits funds or securities into an escrow to provide for payment of a prior issue.

The MSRB glossary distinguishes legal defeasance, which ends bondholders' rights and lien under the bond contract, from economic defeasance, where the issuer stays legally obligated if the deposited funds prove insufficient.

The defeasance guide covers both forms.

Demand deposit SLGS

Demand Deposit SLGS are one-day certificates rolling daily until redeemed, at a rate adjusted from the most recent 13-week Treasury bill auction average, under 31 CFR 344.7(a).

Redemption notice runs one business day at $10 million or less, three above $10 million and below $500 million, and five at $500 million or more, under 31 CFR 344.9(a).

The SLGS guide covers both types.

Draw schedule

A draw schedule projects the expected deposit and drawdown schedule for amounts to be invested.

For GIC purchases, Regulation 1.148-5(d)(6)(iii)(A)(5) requires the solicitation terms to take that schedule into account.

GFOA recommends keeping investment duration no longer than the expected drawdown schedule.

The draw schedule guide shows how to build one.

Fair market value safe harbor

The safe harbor treats the purchase price of a GIC, or of an investment bought for a yield-restricted defeasance escrow, as fair market value on the purchase date when every requirement of Regulation 1.148-5(d)(6)(iii) is met, including a bona fide solicitation and at least three bids from providers without a material financial interest in the issue.

The regulation otherwise presumes investments not traded on an established market are not bought at fair market value.

The safe harbor guide lists every condition.

Flex repo

A flex repo is a repurchase agreement built with withdrawal flexibility sized to a spend-down.

A repo is a sale of securities plus an agreement to repurchase them at a prearranged date and price, economically resembling a collateralized loan per New York Fed research.

The flex repo guide covers the structure.

Form 8038-T

Form 8038-T is the IRS form for paying arbitrage rebate, yield reduction payments and related penalties, filed one per issue.

It also asks whether gross proceeds went into a GIC, with provider and term, and whether proceeds were invested beyond the temporary periods.

The Form 8038-T guide covers filing.

Forward delivery agreement

A forward delivery agreement is an agreement to supply investments on two or more future dates.

The MSRB glossary notes forwards can deliver securities at fixed yields on future dates, and the arbitrage GIC definition includes forward supply contracts.

The forward delivery guide covers the structure.

GIC (guaranteed investment contract)

The MSRB glossary defines a guaranteed investment contract as an investment, secured by a contract with a financial institution, that guarantees a fixed rate of return and a fixed maturity.

Bond-proceeds GICs often carry flexible draw schedules, and the arbitrage definition reaches any nonpurpose investment with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate, under Regulation 1.148-1(b).

The GIC guide covers the product.

Gross proceeds

Gross proceeds means all proceeds of an issue plus all replacement proceeds, under Regulation 1.148-1(b).

Proceeds there are the sale proceeds, investment proceeds and transferred proceeds.

The arbitrage guide explains the pieces.

Haircut

In a repo, the haircut is how far collateral value exceeds the cash lent: New York Fed research gives a $95 loan against $100 of collateral as a 5% haircut.

The repo collateral guide covers margin and valuation.

Indenture

An indenture is the issuer-trustee contract setting out rights, duties and remedies and the security for the bonds, per the MSRB glossary.

Many governmental issues, especially general obligation bonds, are issued without one.

The indenture guide covers proceeds provisions.

Investment agreement

Investment agreement is the umbrella term for negotiated reinvestment contracts.

The SEC has described those products as instruments tailored to a municipality's specific collateral and spend-down needs, such as GICs, repurchase agreements and forward purchase agreements.

The securities-law GIC definition reaches any investment with specified withdrawal or reinvestment provisions and a specifically negotiated or bid interest rate, including forward supply contracts, under 15 U.S.C. 78o-4(e)(2) as narrowed by SEC rule.

The investment agreement comparison weighs contracts against securities.

Investment-type property

Investment-type property generally includes any property held principally as a passive income vehicle, under Regulation 1.148-1(e)(1).

Certain prepayments also create investment-type property, with exceptions such as prepayment within 90 days of expected delivery.

The products guide covers what this reaches.

IRMA

An IRMA is a registered municipal advisor that is not, and within at least the past two years was not, associated with the person relying on the exemption, under SEC Rule 15Ba1-1(d)(3)(vi).

With IRMA advice on the same aspects, the issuer's written representation and required disclosures, an unregistered person may advise.

The IRMA exemption guide covers the conditions.

Issuer

For the municipal advisor rules, a municipal entity includes any state, political subdivision, agency, authority, plan, program, pool or other municipal securities issuer, under SEC Rule 15Ba1-1(g).

The municipal bond guide describes the issuer's side.

LGIP

The MSRB glossary defines a local government investment pool as a state or local government pool investing participating governmental units' public funds, whose participants buy shares or units.

The LGIP guide covers pool deposits.

Minor portion

Gross proceeds up to the lesser of 5% of sale proceeds or $100,000 may be invested in higher yielding investments without making the bonds arbitrage bonds, under Regulation 1.148-2(g); 26 U.S.C. 148(e) states the 5% as a share of the proceeds of the issue.

The $100,000 figure is fixed, not indexed, and the exception limits yield restriction only, not rebate.

The minor portion guide covers the exception.

Money market fund

A government money market fund under SEC Rule 2a-7 invests 99.5% or more of assets in cash, government securities and fully collateralized repos.

Government and retail funds may use amortized cost or penny rounding, a permitted convention, not a promise.

The money market fund guide covers fund use.

Municipal advisor

Federal law defines a municipal advisor as a person advising a municipal entity or obligated person on municipal financial products, including municipal derivatives, GICs and investment strategies, or on securities issuance, under Exchange Act section 15B(e)(4)(A).

Advice means a recommendation particularized to specific needs or circumstances; general information involving no recommendation is excluded.

The municipal advisor guide covers the role.

Municipal bond

The MSRB glossary describes municipal securities as obligations of states and local governments, most paying interest generally excluded from federal gross income.

Some are taxable, Build America Bonds among them.

The municipal bond guide starts from the issuer.

Municipal escrow investments

Municipal escrow investments are securities proceeds and other municipal funds deposited in escrow to pay principal, premium and interest on issues, under SEC Rule 15Ba1-1(h)(1).

The SLGS versus open-market comparison covers how escrows are built.

Negative arbitrage

Negative arbitrage is proceeds earning less than the bond yield while they wait to be spent.

The SEC explained that in a negative-arbitrage escrow, dealer overcharges take money from the municipality rather than the Treasury, reducing the issuer's refunding savings dollar for dollar.

GFOA suggests staging bond issues over the construction period, rather than issuing well before spending begins, to limit arbitrage liability and negative arbitrage.

The negative arbitrage guide covers the math.

Obligated person

An obligated person is a person committed by contract to support payment on the securities; the rule excludes bond insurers and liquidity providers, among others, under SEC Rule 15Ba1-1(k).

Under the MSRB's conduct rule for municipal advisors, an advisor owes a municipal entity client a fiduciary duty, which the Exchange Act at 15 U.S.C. 78o-4(c)(1) also imposes, and owes an obligated person client a duty of care.

The conduit sector guide explains the roles.

Permitted investments

The MSRB glossary defines permitted investments as the instruments a bond contract allows for proceeds, distinct from eligible securities, which often mean defeasance escrow holdings.

The permitted investments guide covers the sources.

Post-issuance compliance

Post-issuance compliance is the recordkeeping and tax work after closing, and GFOA recommends written policies identifying key documents and retention periods.

Governments may outsource tasks such as rebate computations while keeping ultimate responsibility.

The post-issuance compliance guide covers the procedures.

Provider

A provider is the financial institution on the other side of an investment contract such as a GIC.

The SEC has said a GIC provider is generally not a municipal advisor unless it advises on buying the GIC.

In mGIC's Bidding Agent work the winning provider pays the fee, at or below the safe-harbor maximum, disclosed.

The GIC guide covers credit terms.

Reasonably required reserve fund (RRRF)

A reasonably required reserve or replacement fund is capped at the least of 10% of stated principal, maximum annual debt service, or 125% of average annual debt service, under Regulation 1.148-2(f)(2)(ii).

Earnings in a qualifying fund are generally still subject to rebate.

The RRRF guide covers the test.

Rebate

Arbitrage rebate is the excess of the future value of investment receipts over payments compounded at the bond yield, paid to the United States, under Regulation 1.148-3(b) and (c).

Yield restriction does not settle it: where the yield rules allow above-bond investing, rebate may still take those earnings, per Publication 5271.

The rebate guide covers the requirement.

Rebate fund

A rebate fund holds the amounts an issuer computes as payable to the United States.

Every rebate payment is due no later than 60 days after the computation date to which it relates, under Regulation 1.148-3(g).

The rebate fund guide covers the account.

Refunding

A refunding issue is one whose proceeds pay principal, interest or redemption price on a prior issue, under Regulation 1.150-1(d)(1).

A current refunding is issued no more than 90 days before the last expenditure of its proceeds to pay the prior issue; any other refunding is an advance refunding, under Regulation 1.150-1(d)(3)-(4).

Interest on advance refunding bonds issued after December 31, 2017 is not tax-exempt, under 26 U.S.C. 149(d).

The refundings guide covers the types.

Refunding escrow

A refunding escrow holds refunding proceeds and other amounts to pay principal or interest on prior issues, under Regulation 1.148-1(b).

The MSRB glossary says advance refunding proceeds are generally invested in Treasury or federal agency securities, and that SLGS are most commonly used for deposit in an escrow account in connection with refunding bonds.

The refunding escrow guide covers the structure.

Replacement proceeds

Replacement proceeds are amounts with a sufficiently direct nexus to the issue that they would have served its purpose absent bond proceeds, under Regulation 1.148-1(c)(1).

Sinking funds and pledged funds are the common examples; mere availability does not create the nexus.

The replacement proceeds guide covers the test.

Safety, liquidity and yield

mGIC ranks the priorities for bond-proceeds investments safety first, then liquidity, then yield.

The priorities guide explains the ordering.

SLGS

SLGS are non-marketable State and Local Government Series securities Treasury offers to help issuers of tax-advantaged bonds comply with the Internal Revenue Code, under 31 CFR 344.0(a).

The two types are Time Deposit and Demand Deposit securities; offering continues until the Secretary terminates it.

The SLGS guide covers subscriptions and rates.

Small issuer exception

The small issuer exception treats rebate as met for a governmental unit with general taxing powers that reasonably expects to issue no more than $5 million of tax-exempt bonds in the calendar year, with no private activity bonds and at least 95% of net proceeds going to the unit's local governmental activities, under 26 U.S.C. 148(f)(4)(D).

The limit rises by the lesser of $10 million or the bonds attributable to public school facility construction, and the amounts are fixed, not indexed.

The exception removes rebate, not yield restriction.

The small issuer guide covers the conditions.

SOFR

The Federal Reserve Bank of New York defines SOFR, the Secured Overnight Financing Rate, as a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

The SOFR guide covers its pricing role.

Spending exception

A spending exception treats the rebate requirement as met when the issue's gross proceeds, as specially defined for the exceptions, are spent on the government purpose on schedule and rebate is paid on amounts not required to be spent.

Regulation 1.148-7 provides 6-month, 18-month and 2-year schedules.

The 18-month schedule requires 15% at 6 months, 60% at 12 and 100% at 18; the 2-year schedule, which applies only to the available construction proceeds of a construction issue, requires 10% at 6 months, 45% at 1 year, 75% at 18 and 100% at 2.

The 18-month exception also requires all gross proceeds to qualify for the 3-year capital-project temporary period.

Only the 6-month exception applies to refunding issues.

The spending exceptions guide compares the schedules.

Stable value contract

A stable value contract is a retirement-plan bank or insurer wrap paying participants at book value, a different product and setting from a bond-proceeds investment agreement.

The GIC guide explains the difference.

STRIPS

STRIPS, Separate Trading of Registered Interest and Principal Securities, are the separately traded interest and principal pieces of fixed-principal Treasury notes, bonds and TIPS, with the economic and trading characteristics of zero coupon bonds.

The Treasury portfolio guide shows their use.

Structured Treasury portfolio

In mGIC's structured Treasury portfolios, U.S. Treasury securities are matched to the issuer's anticipated cash needs, with a money-market allocation for faster-than-expected spend-down.

The Treasury portfolio guide covers the structure.

Temporary period

A temporary period is a reasonable period when proceeds may be invested in higher yielding investments without the bonds being arbitrage bonds solely for that reason, under 26 U.S.C. 148(c)(1).

Lengths include 3 years for qualifying capital projects, 13 months for bona fide debt service funds, and 30 days generally for refunding proceeds, with 90 days for current refundings.

A temporary period answers yield restriction only; rebate can still apply.

The temporary periods guide lists the windows.

Transferred proceeds

Transferred proceeds are proceeds of a refunded issue that become proceeds of the refunding issue, defined in Regulation 1.148-9.

They follow their own temporary period rules under Regulation 1.148-9(d)(2)(iii).

The temporary periods guide covers the windows.

Unspent proceeds

Unspent proceeds are the gross proceeds an issuer still holds after closing.

Whether an issue is arbitrage bonds turns on reasonable expectations at the issue date, which an officer of the issuer responsible for issuing the bonds certifies in good faith.

The unspent proceeds guide covers the options.

Verification agent

A verification agent, typically a CPA firm, confirms a refunding escrow can pay the refunded bonds and meet any yield limit, per GFOA.

The deliverable is a verification report by a CPA or other independent third party, per the MSRB glossary.

The escrow verification guide covers the check.

Yield burning

The SEC has described yield burning as dealers overcharging issuers for open-market escrow securities in positive-arbitrage advance refundings, diverting arbitrage from the United States.

The MSRB glossary describes it as the sale to an issuer of escrow securities, typically Treasuries, at above-market prices to reduce their yield and avoid arbitrage rules.

The SEC announced 10 actions on April 6, 2000, including a Dain Rauscher settlement of about $13 million.

The yield burning guide covers the history.

Yield reduction payment

A yield reduction payment is an amount paid to the United States treated as a payment on an investment, reducing its yield, under Regulation 1.148-5(c)(1).

Payments are limited to the categories the regulation lists and are made on the rebate schedule on Form 8038-T.

The yield reduction guide covers the categories.

Yield restriction

Yield restriction caps invested proceeds at the bond yield; Regulation 1.148-2(d)(2)(i) treats a yield as materially higher when it exceeds the bond yield by more than one-eighth of 1 percentage point.

For refunding escrow and replacement proceeds, the line tightens to one-thousandth of 1 percentage point.

The yield restriction guide covers the exceptions.

When a term here surfaces a live question, the contact page starts a free, no-obligation reinvestment review.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.