Liquidity, Default, Taxes and Yields on Municipal Bonds

Topics:
Investment Strategy,
Taxes
Tags:
Finance,
Financial Planning,
Free Trade,
Investment,
Liquidity,
Municipal Bond,
Taxes
Source:
Federal Reserve Board

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Overview: This paper examines the relative yields of Treasuries and municipals using a generalized model that includes liquidity as a state factor. Using a unique transaction dataset, it is able to estimate the liquidity risk of municipals and its effect on bond yields. It is found that a substantial portion of the maturity spread between long- and short-maturity municipal bonds is attributable to the liquidity premium. Controlling for the effects of default and liquidity risk, they can obtain implicit tax rates very close to the statutory tax rates of high-income individuals and corporations, and these tax rate estimates are remarkably stable over maturities.

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Format: PDF | Size: 216KB | Date: Jul 2005 | Pages: 53

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