What does arbitrage allow an issuer to do?

Arbitrage enables an issuer to capitalize on differences in interest rates or pricing between two or more bond markets. Specifically, it allows issuers to borrow funds at a lower interest rate and invest them in higher-yielding investments, thus earning a profit from the difference. This strategy relies on the time-sensitive nature of financial markets, where discrepancies may occur between the rates for different bonds due to various factors, including market conditions, credit ratings, and economic indicators.

By engaging in arbitrage, the issuer effectively enhances financial returns while managing their capital more efficiently. This is particularly beneficial in environments where interest rates fluctuate or market inefficiencies exist. The potential to earn yield through arbitrage reflects the fundamental principles of finance, where smart investment strategies are aimed at maximizing gains.

In contrast, the other options do not accurately reflect the primary function of arbitrage. While reducing overall debt obligations and increasing maturity might be beneficial financial strategies, they do not capture the essence of what arbitrage allows an issuer to achieve. Similarly, selling bonds at a higher rate than the purchase price relates more to transaction outcomes rather than the strategic investment benefits of engaging in arbitrage.