Tax Distortions and Bond Issue Pricing
Publication Date
2-22-2016
Abstract
Original issue premium (OIP) bonds are the norm in the U.S. tax-exempt market, but very rare in the taxable market. A tax subsidy helps explain this disparity. Unlike bonds issued at par or discount, the price of OIP bonds can fall and yet remain above par. Thus, secondary market buyers of tax-exempt OIP bonds receive relatively more tax-exempt coupon and less taxable market discount. Investors' aversion to taxable market discount explains additional, previously undocumented empirical facts. In a calibration exercise, this subsidy's expected cost to the U.S. Treasury is estimated at $1.7 billion per year. Appendix is available at: https://ssrn.com/abstract=3075670
Document Type
Article
Keywords
municipal, bonds, tax-exempt, tax distortions, tax arbitrage, coupon, issue price
Disciplines
Finance
DOI
10.2139/ssrn.2735812
Source
SMU Cox: Finance (Topic)
Language
English
