Tax Arbitrage

Question 0

B. i) explain tax arbitrage salary

Answer 0

1. Salary/ interest rate
   Borrow #1 answer at interest rate. With proceeds of borrowing, buy tax exempt bonds. The interest expense on borrowing offsets ordinary income leaving you with $0 of taxable income. Return on bonds is tax-free providing arbitrage profit.

Question 1

What widely used tax strategy discussed in class is a variation of the disallowed short against the box transaction?

Answer 1

Variable prepaid forward contract

Question 2

B) ii below what pre-tax rate of return?

Answer 2

Interest rate (1-tax rate)

Eg 12.5%(1-.4)