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The Behavior of the Interest Rate Differential Between Tax‐exempt Revenue and General Obligation Bonds: A Test of Risk Preferences and Market Segmentation
Author(s) -
KIDWELL DAVID S.,
KOCH* TIMOTHY W.
Publication year - 1982
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1982.tb01096.x
Subject(s) - bond , debt , obligation , yield (engineering) , revenue , monetary economics , business , revenue bond , differential (mechanical device) , bond market , market segmentation , economics , microeconomics , finance , law , materials science , engineering , political science , metallurgy , aerospace engineering
This paper presents evidence that the yield differential between revenue bonds and similar general obligation bonds varies contracyclically with the level of economic activity. The evidence also indicates that significant investor‐borrower induced market segmentation exists in the municipal bond market. An increase in the relative demand by commercial banks for tax‐exempt securities and/or an increase in the supply of revenue bonds relative to the supply of general obligation bonds increase the yield spread between the two classes of debt. These findings were the result of a series of empirical tests with both macroeconomic and microeconomic data.