Tax-Induced Intra-Year Patterns in Bonds Yields

Authors

  • SHALOM J. HOCHMAN,

  • ODED PALMON,

  • ALEX P. TANG

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    • Hochman is from the College of Business Administration at the University of Houston and is visiting the Faculty of Management at Tel-Aviv University, Palmon is from the School of Business at Rutgers University, and Tang is from the School of Business and Management at Morgan State University. We thank Amir Barnea, Ramon Rabinovitch, Stephen A. Buser (the co-editor), René M. Stulz (the editor), and two anonymous referees for their comments and suggestions.


ABSTRACT

The ratio of the yields on short-term tax-exempt and taxable bonds exhibits a sawtooth pattern that is consistent with the 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 differ 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 timing strategies for scheduling interest payments.

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