Expected Inflation and the Real Rates of Interest on Taxable and Tax-Exempt Bonds.

This paper analyzes the impact of inflation on rates of return on taxable corporate bonds and tax-exempt municipal bonds. The paper considers a differential tax system, where the tax rate depen ds on both the identity of the investor and the source of income. It also consid ers the possibility that inflation may induce investors to switch from holding one asset to holding another. It is demonstrated that while inflation should increase the (pre-personal tax) real rate of interest on taxable bonds, it should reduce the real rate of interest on tax-exempt bonds. Copyright 1987 by Ohio State University Press.

Tax-Induced Intra-Year Patterns in Bonds Yields.

The ratio of the yields on short-term tax-exempt and taxable bonds exhibits a sawtooth pattern that is consistent with th e impacts of tax deferments from dates on which interest payments are received to dates on which the resulting tax payments are paid. The effect of the tax deferment at turns of calendar years does not diff er appreciably from the effect at the turn of any other tax quarter. Investors with tax payment schedules that differ from that of the investor that is indifferent between investing in taxable and tax-exempt bonds may benefit from tax-related timing strategies for investing in these bonds. Issuers may benefit from tax-related timin g strategies for scheduling interest payments. Copyright 1993 by American Finance Association.