The individual's tax-exempt bond portfolio decision under income uncertainty

In this article, an individual's tax-exempt bond portfolio decision is investigated. A model capturing the relationship between income uncertainty and optimal portfolio choice is defined when an individual decision-maker has the opportunity to hold higher yielding private-activity bonds. The findings in this article show that in most cases risk-averse individuals will maximize the expected utility of after-tax income by holding a large proportion of private-activity bonds in their portfolio even under income uncertainty and the risk of a minimum tax liability. Those individuals who would benefit from holding private-activity bonds in a tax-exempt portfolio are identified and the magnitude of the benefit is quantified.