The relative yield spread of taxable and tax-exempt bonds for a particular term-to-maturity is defined as the ratio of the yield spread of the two types of bonds of that term-to-maturity to the yield of the corresponding taxable bond.
t] for i = 1, 2, and Equations 14, 17, and 18 imply that the future relative yield spreads are higher than the current relative yield spread:
t] for i = 1, 2, and Equations 14, 17, and 18 imply that the future relative yield spreads are lower than the current relative yield spread:
The term structure of relative yield spreads between U.
The theoretical attempts to study relative yield spreads of taxable and tax-exempt bonds started from Miller (1977) and Fama (1977).
Although relative yield spreads have become consistently narrower since then (see Table 1), the downward-sloping pattern of the term structure appeared [TABULAR DATA FOR TABLE 1 OMITTED] unchanged in general.
Researchers who have studied taxable versus tax-exempt bond yields have focused rather narrowly on one or another factor that may account for the observed pattern of relative yield spreads.
Within the model framework, this paper shows how uncertain future income and tax rates, and income and substitution effects are related to the term structure of relative yield spreads.
This section shows how the term structure of relative yield spreads and uncertainty introduced by the exogenously-given income process are related.
Equations 17 and 18 indicate that there are two major factors affecting the future relative yield spreads.
As term-to-maturity increases, relative yield spreads would approach the (indifference) tax rate from above.