Blount National Bank Professor of Finance, The University of Tennessee and Associate Professor of Finance, Texas Tech University, respectively. Appreciation is expressed to George G. Kaufman, Patric H. Hendershott, William J. Marshall and Robert J. Rogowski for their comments, and to Raymond Spudeck for his research assistance.
The Behavior of the Interest Rate Differential Between Tax-exempt Revenue and General Obligation Bonds: A Test of Risk Preferences and Market Segmentation
Article first published online: 30 APR 2012
1982 The American Finance Association
The Journal of Finance
Volume 37, Issue 1, pages 73–85, March 1982
How to Cite
KIDWELL, D. S. and KOCH, T. W. (1982), The Behavior of the Interest Rate Differential Between Tax-exempt Revenue and General Obligation Bonds: A Test of Risk Preferences and Market Segmentation. The Journal of Finance, 37: 73–85. doi: 10.1111/j.1540-6261.1982.tb01096.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
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.