Generally speaking, obligations issued by governmental entities are "tax-exempt" issues. That is, interest earned by the bond or note holder is exempt from federal and sometimes state income taxes. As a result of the Tax Reform Act of 1986, obligations issued by state and local governments are tax-exempt only if the issuers pay rebate to the federal governmental of the earnings on the investment of the proceeds of a tax-exempt issue in excess of the yield on such obligations and any income earned on such excess, known as the rebatable arbitrage.

As a result, issuers of obligations are required to calculate rebatable arbitrage at least once every 5 years and at least 90% of the amount calculated must be paid once every five years and 100% within 60 days of the final redemption of the issue.