Municipal Bonds

Advance Refundings of Municipal Bonds

Municipal bonds are often “advance refunded.” Bonds that are not yet callable are defeased by creating a trust that pays the interest up to the call date, and pays the call price. New debt, generally at lower interest rates, is issued to fund the trust. Advance refunding has zero net present value in the case of no uncertainty and no fees, otherwise the transaction destroys value. We estimate t...

A Weekly New Issue Yield Curve for Municipal Bonds

Private Guarantees for Municipal Bonds: Evidence from the Aftermarket**

This paper considers the market for private guarantees for municipal debt. It reviews the empirical evidence on the effects of insurance upon the pricing of new is.sues. It also presents the first empirical evidence available on the effects of bond insurance in the aftermarket for tax exempt securities. Aftermarket trades in identical securities in insured and uninsured forms are used to estima...

Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds∗

We show that the effect of tax advantages of municipal bonds on the market microstructure of municipal bond auctions is a crucial determinant of state and local governments’ borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3-pp. lowers mean borrowing costs by 9-10%, consistent with a greater-than-unity passthrough elasticity. Non-parametric evidence shows that s...

How Prevalent is Tax Arbitrage? Evidence from the Market for Municipal Bonds

Although tax arbitrage is central to the literatures on tax capitalization, implicit taxes, and even capital structure, there is little empirical evidence of the extent to which firms actually engage in tax arbitrage. This paper provides some evidence on the topic by focusing on a simple and observable corporate arbitrage strategy in the market for municipal bonds. It poses a puzzle for the lit...