Fixed-income arbitrage is a group of market-neutral-investment strategies that are designed to take advantage of differences in interest rates between varying fixed-income securities or contracts (Jefferson, 2007). Arbitrage in terms of investment strategy, involves buying securities on one market for immediate resale on another market in order to profit from a price discrepancy. Fixed-income securities are debt instruments issued by a government, corporation, or other entity to finance and expand their operations. The purchasing of any fixed-income security is known as a loan from the investor to the issuer. These ‘loans’ made from the investor to the borrower are in exchange for regular income payments to the investor, as well as the investor receiving the capital returned upon maturity of the loan. The mechanics of the agreement are similar across all variations of fixed-income instruments, whereby there is a fixed tenor and schedule of income payments. Repayment of capital at maturity is expected and will only not occur if the issuer defaults or becomes insolvent. The following are examples of fixed-income securities: Treasury bills Corporate bonds Municipal bonds Credit default swaps The mechanics of the strategy are to purchase a fixed-income security and resell it at a higher price. The strategy is used when there are signs of mispricing of fixed-income securities in the market, whereby, for example, fixed-income arbitrage funds will take a short or long position on the security to benefit when the price is later corrected in the market. Fixed-income securities differ from equities, whereby for fixed-income securities dividends are non-discretionary. The strategy is most commonly used by investment banks and hedge funds globally. Fixed-Income Arbitrage Strategies in the Market Swap Spread Arbitrage Within the fixed-income markets, an interest-rate swap is a derivative that exchanges the cash flows generated from a fixed-rate loan (a fixed-income security) to the cashflows generated from a floating-rate loan. The group receiving the fixed-rate (E.g. receiving the fixed-rate on a Treasury Bond), better known as the Yield to Maturity Swap Rate (‘YTMsr’), pays the floating Bank Bill Swap Rate (‘BBSW’). For every time period, the arbitrageur's net payment is the YTMsr – BBSW, then this is multiplied by the notional principal amount (E.g. A$10,000) and the time between payments (E.g. 6 months). The group paying the fixed-rate, which is the owner of the Treasury bond financed at the repurchased rate, will also receive a fixed-coupon on the yield to maturity (E.g. yield