How often must arbitrage be calculated and rebated under federal law?

Under federal law, the calculation and rebate of arbitrage must be performed every five years. This requirement applies to tax-exempt bonds and is established to ensure that issuers of these bonds comply with federal tax laws regarding the use of bond proceeds.

The rationale for this five-year period is to mitigate the potential for issuers to earn excess investment income from the proceeds of tax-exempt bonds, which can lead to creating a tax-exempt arbitrage situation. By conducting these calculations every five years, the government maintains oversight and helps in ensuring that issuers are not benefitting unduly from the spread between tax-exempt rates and their investment returns. This regulation serves to protect the integrity of the tax-exempt bond market and promote fair practices amongst issuers.

The other options of one, two, or three years do not align with federal regulations, which specifically stipulate the five-year interval for these calculations and rebates.