Determinants of the decreasing term structure of relative yield spreads for taxable and tax-exempt bonds |
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| Authors: | Lawrence Kryzanowski Kuan Xu Hua Zhang |
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| Institution: | 1. Department of Finance , Condordia University , de Maisonneuve Boulevard West, Montreal , 1455 , CanadaH3G IM8;2. Dalhousie University , Halifax , CanadaB3H 3J5;3. Chinese University of Hong Kong , Shatin , Hong Kong |
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| Abstract: | The empirical finding that the relative yield spread for taxable and tax-exempt bonds decreases across the term structure is usually attributed to tax differentials and/or arbitrage opportunities. Using monthly data, it is found that the decresing term structure of relative yield spreads is determined by the decreasing forward marginal tax rate; increasing default risk premium; increasing tax-timing option premium; and expected rate of inflation |
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