What does an arbitrage calculation assess?

An arbitrage calculation primarily assesses the relationship between investment earnings and interest costs. This involves analyzing whether the earnings generated from the investment of bond proceeds exceed the costs associated with the interest payments on the bonds issued. Essentially, it evaluates how effectively the funds raised through borrowing are being utilized to generate a return, which is especially relevant in the context of municipal finance and tax regulation.

When municipalities issue bonds, they may not deploy the proceeds immediately, allowing them to invest those funds. If the investment of these proceeds yields returns that are greater than the interest cost of the bonds, this scenario results in arbitrage. However, there are regulatory constraints to consider, such as the IRS rules prohibiting excessive arbitrage, which aim to ensure that the tax-exempt status of municipal bonds is not abused.

Other options, while relevant in broader municipal finance discussions, do not specifically capture the essence of arbitrage calculations. Compliance with tax regulations pertains to ensuring that all actions taken with regard to borrowing are aligned with legal frameworks. Interest costs versus capital expenditures relates to financial planning and budget management but does not directly tie to arbitrage. Forecasting future interest rates is a predictive analysis rather than an assessment of current financial performance related to borrowing and investment. Therefore, option C stands out