The Changing Market for Tax-Exempt Bonds

by W. Crum



The most important factor that has been affecting both the size and nature of the potential market for tax-exempt bonds is the rising ratio of "take home" interest on these bonds to that on taxable bonds. The article explores reasons behind this sharp rise in the ratio in recent years and investigates measures that must be taken in order to tap this changing market. The investor's choice between two bonds differ only in that the interest on one is taxable whereas the interest on the other is exempt from Federal income tax; in interest rate, that is, the coupon rate when both bonds are priced at par; and in the denominations available for purchase. An analysis has been made of the choice which exists when the bonds also differ in one or more of these respects; and when coupon rates are replaced by yields to maturity. By using figures which reflect the prevailing conditions and making assumptions which are tolerably realistic, the situation has been explained with fair precision. Finally, a discussion on some recent changes in the market and their general implications has been made.

California Management Review

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Published at Berkeley Haas for more than sixty years, California Management Review seeks to share knowledge that challenges convention and shows a better way of doing business.

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