Tax distortions and bond issue pricing / by Mattia Landoni
Mattia Landoni
- Amsterdam Elsevier August 2018
- Pages 382-393
- Journal of Financial Economics 129 (2) 0304-405X .
Abstract Original issue premium (OIP) bonds are the norm in the US tax-exempt market but very rare in the taxable market. A tax subsidy helps explain this disparity. Unlike bonds issued at par or discount, the price of OIP bonds can fall and yet remain above par, providing secondary market buyers with more tax-exempt coupon and less taxable market discount gain. The subsidy for OIP bonds explains additional, previously undocumented empirical facts. In a calibration exercise, the subsidy’s expected cost to the U.S. Treasury is estimated at $1.7 billion per year.