SECTION 5. Arbitrage Provisions

5.1. Certain Special Rules on Qualified Hedges for Arbitrage Purposes . Solely for purposes of the arbitrage investment restrictions (including, without limitation, both yield restriction and rebate) under § 148, in determining whether a modification of a qualified hedge results in a termination of the hedge under § 1.148–4(h), such a modification is not treated as a termination of the hedge if both: (1) the modification is not reasonably expected as of the date of the modification to change the yield on the affected hedged bonds over the remaining term of the hedged bonds by more than one quarter of one percent (.25 percent or twenty-five basis points) per annum ; and (2) the payments and receipts on the qualified hedge, as modified, are fully taken into account as adjustments to the yield on those hedged bonds for arbitrage purposes under § 148. Further, for arbitrage purposes under § 148, a qualified hedge with respect to bonds is not deemed terminated under § 1.148–4(h) as a result of the governmental issuer’s holding of the hedged bonds during either the 90-day permitted holding period or the 180-day temporary permitted holding period under § 3.2(3), or the 180-day permitted holding period under § 4 of this notice during which the governmental issuer is permitted to hold such bonds without resulting in a reissuance or retirement of such bonds.

5.2. Special Rule for Certain Purchases by Conduit Borrowers . In applying the special arbitrage rule for “program investments” under § 1.148–1(b) which restricts a conduit borrower’s purchase of tax-exempt bonds for a governmental program in an amount “related” to the amount of its purpose investment financed by the program, a conduit borrower’s purchase of a tax-exempt auction rate bond that financed its loan to facilitate liquidity under adverse

is a fixed interest rate for the remaining term of the bond to maturity, the bond may be resold at a market premium or a market discount from the stated principal amount of that bond.

(3). Qualified Tender Right . (a) In General . A “qualified tender right” is a tender right for the purchase of a bond (regardless of whether the purchase is by or on behalf of a governmental issuer) that is authorized under the terms of a bond upon its original issuance and that meets all of the requirements of this § 3.2(3)(a). The tender right must involve either an optional tender right or a mandatory tender requirement which allows or requires the bondholder to tender the bond for purchase on at least one tender date before the final stated maturity date. The tender right must entitle a tendering bondholder to receive a purchase price equal to par (which may include any accrued interest). The terms of the tender right must require the issuer or its remarketing agent to use at least best efforts to remarket a bond upon a purchase pursuant to the tender right.

(b) Operating Rules for Purchases Pur- suant to a Qualified Tender Right . A bond purchased by or on behalf of a governmental issuer pursuant to a qualified tender right is treated as not retired pursuant to and as a result of the qualified tender right until not later than the end of the 90-day period from and after the date of such purchase, and subsequent to the end of this 90-day period, a governmental issuer generally may not hold its own bond without causing a retirement of such bond under the general rules in § 3.1 of this notice. This 90-day period is extended to 180-days, however, with respect to any purchase by or on behalf of a governmental issuer pursuant to a qualified tender right as long as such purchase occurs before October 1, 2008.

Thus, with respect to such bonds purchased before October 1, 2008, during this 180-day period, a governmental issuer or its agent may hold the bond under the terms of the bond without causing a retirement of the bond. In addition, recognizing that the bond is treated as outstanding during this 180-day period, the governmental issuer may refund the bond with a refunding bond during this period upon a failed remarketing.

By contrast, third-party guarantors, third-party liquidity facility providers, and

conduit borrowers (other than a conduit borrower that is a governmental issuer) are not treated as purchasers by or on behalf of a governmental issuer under the general rules in § 3.1 of this notice, and, accordingly, any such person may hold a bond purchased pursuant to the exercise of a qualified tender right for an unlimited holding period without causing a retirement of such bond. Further, for example, a governmental issuer may hold a bond purchased before October 1, 2008, pursuant to the exercise of a qualified tender right for a holding period of 179 days while using best efforts under the terms of the bonds to remarket the bond and then resell the bond to a third-party guarantor, third-party liquidity facility provider, or other independent third party before the expiration of the 180-day period in compliance with the operating rules in this § 3.2(3)(b).

(4). Governmental issuer. A “governmental issuer” is an issuer of a tax-exempt bond that is a governmental unit or an agency or instrumentality thereof.