4.9.2 Penalty in Lieu of Rebate

The Tax Code also allows an issuer to pay a penalty in lieu of a rebate, if the issuer so elects at the time its bonds are issued (i.e., at closing). The penalty is 1.5% of the amount of proceeds of the bond issue that, as of the close of each 6 month period described above in Section 4.9.1, Rebate Exceptions, are not spent in accordance with the 2 year expenditure schedule. The election to pay a penalty in lieu of rebate should only be contemplated by an issuer if the bond proceeds are expected to be invested substantially above the yield on the bonds; otherwise, an issuer may find itself paying a penalty even though the issuer is not realizing any significant arbitrage earnings.