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The article describes several reports published within the issue, such as one by Louis Bachelier on the bond market.

Professor Katz has opened a neglected area of study in the pricing processes of the securities markets with what is, on the whole, a very estimable first effort. The rash of bond reclassifications in recent years found us with little or no knowledge of their effects, particularly with respect to yields. In this regard Katz's paper is a needed and welcome one. It may also be that, as his paper says, investigation will reveal something of bond market efficiency, though this is much more problematic and conjectural than the more narrowly framed problem of repercussions on yield of rating change. [ABSTRACT FROM AUTHOR]

The article presents commentary about a paper written by Roman L. Weil, Joel E. Segall, and David Green, Jr. (WSG) entitled "Premiums on Convertible Bonds," which was published in the June, 1968 edition of the "Journal of Finance." In that paper WSG explored to what extent bond premiums could be explained or predicted by available data. The author of the current paper contends that the regression analysis performed by WSG was not properly designed. He also criticizes comments made by Paul D. Cretien, Jr. about the WSG paper.

The article presents commentary about a paper written by Roman L. Weil, Joel E. Segall, and David Green, Jr. (WSG) entitled "Premiums on Convertible Bonds," which was published in the June, 1968 edition of the "Journal of Finance." In that paper WSG observed that the "floor" for convertible bonds contributes little, if anything, to the bond premium. The author of the current paper identifies and explains what he considers to be flaws in their reasoning. In his view it is not clear what contribution the floor makes to a convertible bond premium.

Both in the theoretical and applied literature of finance the difference in yield-to-maturity between corporate bonds and government bonds has been used as a measure of the incremental riskiness of the former over the latter. While this approach has sometimes provided interesting results, the usefulness of yield spreads is lessened by inherent biases and implicit assumptions as to the pattern of risk adjustment for future promised cash flows. This article presents an alternative measure of the incremental risk compensation process over time on risky bonds. The proposed alternative views the risky bond price as the discounted present value of future certainty equivalent payments. The certainty coefficient, which is the ratio of certainty equivalent to promised payment, gives an implicit measure of risk adjustment for a given future payment period. Time series movements in the overall vector of these coefficients (empirically derived at each point in time for a number of future promised payment periods) within a given risk class represent a dynamic picture of changing risk compensation. The general methodology of this paper centers upon the estimation of single equation regression coefficients for the certainty coefficient variables and for additional variables representing marketability, callability and tax characteristics for bonds in a given risk class. Agency ratings are used to approximate equivalent risk classes and the Almon regression-interpolation procedure is used to estimate structures of certainty coefficients annually from 1952 to 1964. The empirical results over this period for investment grade bonds confirm the usefulness of the approach. The study furthermore indicates that, while call options and taxes have the expected effect on bond prices, marketability, as defined, has little impact. This outcome has important implications for the use of marketability measures and risk classes and for the apparent efficiency of the bond market. [ABSTRACT FROM AUTHOR]

In an unstable economy, expectations of changes in price level and rate of exchange play a significant role in motivating the economic behavior of both households and firms. Several econometric studies attempted to predict future expectations on the basis of past observations. Such studies, however, are crucially dependent on the assumptions (1) that there has been a relationship between past performance and expectations, and (2) that the nature of this relationship is known. Another method for the estimation of expectations is the one which derives these expectations on the basis of the price structure of future markets. However, an examination of specific commodities traded on future markets does not provide meaningful estimates, since their future prices reflect, among other things, expected changes in relative prices. This problem can be circumvented by referring to future interest rates which can be derived from the market price structure of financial assets. This paper sets out the theoretical relationship between yields on unlinked and linked bonds, showing that it reflects market expectations of future rates of change in price level and exchange rate. A model is then used to show theoretically that it is possible to derive estimations of market expectations regarding such future rates of change by comparing the yields of unlinked bonds with the yields of bonds linked to the price level and the foreign exchange rate respectively, provided these bonds are identical in all other respects. [ABSTRACT FROM AUTHOR]

The conversion parity of a convertible bond is the product of the number of common shares for which the bond can be exchanged and the market price per share. Alternatively, the conversion parity of a particular convertible bond is the market value of the stock for which the convertible bond can be exchanged. The difference between the market price of the bond and its conversion parity is usually called the premium. In theory, the premium is the difference between the present values of the cash stream expected to accrue to convertible bondholders and the cash stream expected to accrue to the holders of the stock into which the bond is convertible. It is dear that such precise specification is, in the present state of knowledge, impossible. Indeed, recent papers on premiums do not pretend to attempt careful and complete specification, nor does this one. Rather, the objective of this study is to ascertain the degree to which observed premiums can be explained or predicted from obtainable data. This study explains about one-half of the variance in bond premiums. [ABSTRACT FROM AUTHOR]

A conference paper on the performance of corporate bonds in the U.S. during 1964 is presented. The author feels that the bond market will be affected by the economy overall, the growth of economic development, changes in the market, and market response. The author predicts that mortgage debt will increase as will borrowing by the U.S. Treasury because of a tax cut. Another prediction is that an overall increase in income will allow nonbank financial institutions to invest more money.

The article discusses the basic yields from corporate bonds in the U.S. during the period 1952-1957. The yield series first examines a short period right after the Republicans came into power in the spring and summer of 1953. Next, a period beginning in the middle of 1956 and lasting until 1957 is examined, which the author states is more dramatic and longer. The article also discusses the uncertainty of short-term basic yields, basic yields and time series, and the implied forecasts of future yields. Several tables and equations are provided to help illustrate the study.

In his paper "Financial intermediaries, Credit Availability, and Aggregate Demand," Robert Shapiro has presented a "Keynesian" type model with the accent on illustrating the interplay of the bond and money markets. This modal is then extended to handle the case of financial intermediaries--a departure of considerable pedagogical value. In this note an attempt will be made to review and clarify certain concepts in the presentation of Professor Shapiro's basic model of aggregate demand, the point being that his integration of financial intermediaries into the analysis should, if possible, follow from a model free from certain misunderstandings. [ABSTRACT FROM AUTHOR]

Refunding is the operation by which the issuer of a bond calls it before maturity in order to replace it with another issue. The chief reason for calling is the interest saving which a new bond may make possible. In deciding whether to call a bond at any given time, the issuer must consider not only the potential savings from the current refunding, but also from future refundings up to some horizon fixed by financial policy. These savings must also be compared with those resulting from the decision to postpone refunding. This paper formulates the refunding problem in terms of a dynamic programming model in which the term structure of interest rates is utilized to obtain information about the future course of interest rates. [ABSTRACT FROM AUTHOR]

An important restriction which frequently appears in the bid specifications for new issues of municipal bonds is that the total dollar amount to be paid for both principal and interest by the municipality in any given year of the issue must not be significantly different from the total dollar amount to be paid in any other year, i.e., that the total payout pattern over the lifetime of the bond issue must be substantially level. Because of this level debt restriction, the inter-relationships between coupon schedule and maturity schedule appear to underwriters as being very complex. Given the requirements of the marketplace, bond market professionals presently employ trial-and-error techniques in an attempt to determine the admissible coupon and maturity schedule which will lead to the lowest possible net interest cost. The present paper shows that the determination of this optimal coupon and maturity schedule for a level debt issue can be readily accomplished by linear programming techniques. [ABSTRACT FROM AUTHOR]

The article focuses on the development of an investment model to assist dealers or investors in calculating pricing, tax status, and yield for bond sales. It states that discounted financial instruments often are utilized on a gross, yield-to-maturity basis instead of an after-tax yield basis. It mentions that the majority of tables for interest rates and present value only employ integer values for the maturity date, resulting in the manual method employing the same values and being subject to some level of inaccuracy for the effective after-tax yield and price.

The article presents findings on the behavior of Treasury bill and bond holding-period yields which influence the determination of term structure. Alternative theories of the term structure are examined, focusing on relationships between yields anticipated over the same holding period on securities with different maturities, and between expected short-term rates and the term structure. Uniform expectations with and without risk aversion, diverse expectations with risk aversion, and segmented markets are discussed. The author also considers realized holding-period yields under alternative theories of the term structure.

The article comments on the decline of commercial loan in the U.S. from 1920 to 1930. The percentage of commercial loans of national banks to total earning assets reduced from 57.5 per cent in 1920 to 37 percent in 1929. According to the theory underlying the Federal Reserve Act, the provision of commercial loans is the main function of banks. Thus decline of commercial loans has significant impact on the theory underlying the Act and upon the practical operation of the system. The motives which have led the borrowers to reduce their bank loans have been examined. Three main classes of borrowers included in the discussion are the larger corporations, the small merchant and business man, and the farmer. Much of the borrowing from banks is motivated from inability to raise funds in other ways rather that from the economies believed to be associated with the borrowings. It is viewed that continuous association of economic progress with the growing importance of the larger corporations having access to the stock and bond markets will increase the probability of the commercial loans to decline relatively to other bank assets.

The paper is divided into two parts. In Part I, a stock adjustment model with a variable adjustment coefficient is set up to explain state and local government investment. The empirical findings are discussed in Part II. Why does a given actual interest rate cause a municipal borrower to postpone a bond sale at one time and not to postpone it at another time? The search for an answer to this question led to the hypothesis that the timing of state and local government capital outlays depends on the difference between the actual and the expected interest rate. If the interest rate prevailing at the time bonds are to be marketed is what the finance officer expected it to be, he will carry out authorized expenditures without change. But if the rate is higher than expected, he may delay the expenditure of authorized funds. Expectations change over time, providing an explanation of the different attitudes toward the same actual interest rate. This hypothesis can be formalized in a stock adjustment model in which the adjustment coefficient varies with the difference between the actual and the expected interest rate. The research findings reported in this paper flow from an attempt to use such a model to explain state and local government capital outlays for highways from 1951 through 1966.

The focus of this paper is on the area between these two types of studies. The markets for municipal, corporate, and Treasury bonds are investigated through a financial model which embodies supply and demand functions for each market. Financial as well as certain real explanatory variables are brought into a system of simultaneous equations in order to test various hypotheses. In this way, we hope to come to a better understanding of the behavior of bond markets in the United States. The results are found to be consistent with municipal and Treasury bonds, and corporate and Treasury bonds, being relatively close substitutes for one another. Moreover, the demand for bonds does not appear to be influenced by returns available in the stock market. The supply of bonds in all three markets is found to be positively related to expected expenditures and to be interest inelastic.
In this paper, a number of hypotheses about the corporate, municipal, and Treasury bond markets were tested empirically. Demand and supply functions for each market were incorporated into a simultaneous equations model. Using the two-stage least squares estimating technique on data for the 1953-1968 period, insight was gained into the interrelationship between bond markets. The estimated parameters were in general agreement with hypotheses regarding the functioning of the markets; demand for bonds is influenced positively by own interest rates and negatively by lagged holdings and interest rates on substitute bonds. Of considerable interest was the fact that the evidence was consistent with municipal and Treasury bonds, and corporate and Treasury bonds, being substitutes, but not consistent with corporate and municipal bonds being substitutes. [ABSTRACT FROM AUTHOR]

WHILE there have been frequent attempts to explain yield-maturity relationships on loans differing only in length of time to maturity, known as the term structure of interest rates, considerable difficulty has been encountered in formulating generally acceptable empirical tests in order to reconcile workable theory with observed behavior in the bond market. Until the work of David Meiselman, comprehensive empirical testing of interest-rate expectations was lacking.[2] Meiselman developed an error-learning model and, testing it with David Durand's basic corporate-yield data for the 1900-54 period, concluded, that interest-rate expectations are revised whenever previously held expectations prove to be in error. Moreover, the evidence was said to support the unbiased expectational theory.[3] In this paper the term structure of interest rates is analyzed empirically, using monthly Treasury yield-curve data that appeared in the Treasury Bulletin for the 1954-63 period. Using Meiselman's error-learning model, I found that a significant portion of the movements in forward rates of interest for the Treasury data under review can be explained by errors in forecasting the one-year actual rate of interest. In contrast to Meiselman's results, however, the constant-term values in the regression studies are consistently positive and significantly different from zero, an occurrence suggesting that the explanation of forward rates can be improved by introduction of a risk variable. Section II of this paper develops a multiple-regression model in which the deviation of actual forward-rate level from accustomed level is employed as an additional independent variable. Results of multiple-regression studies are seen to be consistent with risk varying inversely with the level of interest rates relative to an accustomed interest-rate range. [ABSTRACT FROM AUTHOR]

The article focuses on the major factors and trends in the government bond market in the U.S. in 1952, as described by Leroy M. Piser, who also makes predictions for 1953. The author feels there are several factors that indicate an underlying trend of price movements in the long-term market between 1952 and 1953. The author states that shifts in Treasury and Federal Reserve policy have, and will continue, to affect supply and demand, and appear to be independent of developing changes in the general economic climate.

The purpose of this paper is to determine whether corporations' decisions to borrow in the public or private corporate bond markets are significantly influenced by yield differentials between the two markets and whether the sensitivity of corporations to yield differentials increases with the relative ease with which they can borrow in either market. In recent years, the influence of interest rates on corporation financing decisions has received considerable attention in studies which have sought to identify the determinants of corporate external financing and the maturity composition of corporations' liabilities. In none of these studies, however, can the signs of the interest rate variables in the regression equations be predicted. This is because the expectations hypothesis of the term structure of interest rates, which these studies accept, posits that interest costs will be equalized regardless of the maturity financing strategy a borrower adopts. As a result the credibility of the findings of these studies concerning the influence of interest rates on financing decisions must be questioned even when this influence was found to be significant.

In this paper we examine how the rate of return on a bond of specific maturity changes through time and how the rates for bonds of different lengths of maturity appear to be interrelated. The study is mainly descriptive and does not attempt to construct a complete model of the system. It is hoped that by isolating certain characteristics of the bond market, comments can be made concerning the adequacy of current theories of the term structure and relationships will be found that future theories will need to explain. [ABSTRACT FROM AUTHOR]

In the July 1952, issue of the "Accounting Review,"under the title "Some Notes on the Bond Yield Problem," the author discussed the application of a modified or improved Newton's correction formula to the problem of finding the accurate yield on a bond, the improved formula having been briefly set forth in an earlier paper by Hugh E. Stelson,' who had drawn it from one of the mathematical journals. This article includes the continuation of numbers of formulas and equations herein from where they stopped in the preceding article. With serial bonds, the problem of finding the initial approximation to the yield rate is more acute than it is with a single bond. This article also discusses the matter appearing in the thirteen pages of Mr. FitzGerald's article in the "Accounting Review," for January, 1953, on accounting for variations in gross profit.

This article discusses the general relationship between term to maturity and change in bond price in the U.S. The high market rates of interest in recent years have given greater practical importance to the inverse relationship between term to maturity and change in bond price. The inverse relationship between duration and coupon makes a higher coupon bond a shorter term bond than a lower coupon bond of the same maturity. To the extent bonds possessing higher risks of default carry higher coupons than default free bonds, a comparison of the rates on these two bonds of equal maturity will underestimate the magnitude of the default risk premium in periods of upward sloping yield curves and overestimate the premium in periods of downward sloping yield curves.

The purpose of this article is to summarize some of the results of studies, part of a larger investigation, into different kinds of well-developed futures markets related to commodities and bonds with an eye toward establishing certain of their common elements that may facilitate a proper evaluation of their role. The article asserts that the key role of a futures market is in facilitating equilibrium across time. If all goods were instantaneously perishable, the future would be irrelevant to equilibrium in the present. On the other hand, the opportunity for storing goods, whether in the form of commodity inventories or congealed as plant and equipment, opens up a potential for tinkering with present and future equilibrium. One of the most interesting aspects of this opportunity for inter-temporal adjustment is its asymmetry. The fact that currently produced goods can be held for future consumption, but, in general, it is not possible to live off the bounty of future generations. Thus, the article discusses the cases of certainty and uncertainty linked with future markets.

This paper analyzes the effects of tax-exempt coupons and capital gains on bond yields. The tax system is taken as given and approximately like the federal tax existing in the U.S. as of November 1969. Of particular interest are answers to such questions as the following. Under what conditions, if any, does there exist a single marginal tax rate which equates the after-tax yield on taxable bonds with different coupon rates? Under what conditions will this same marginal tax rate also equate the after-tax yield of tax-exempt and taxable bonds? How, if it exists, is this marginal tax rate determined? The answers to these questions do not seem immediately obvious. The analysis begins by considering the portfolio selection problem of an individual investor. An algorithm is developed to pick the optimal portfolio from the securities available. The effects on the optimal portfolio of changes in the amount available to invest and the yields of the securities are examined. Next, the determination of a market equilibrium is discussed. From this, conditions are developed under which a single marginal tax rate will equate the after-tax return on various classes of securities. In conclusion, some empirical questions are examined on recent observations of treasuries and tax-exempt housing notes.

The article presents the author's response to the paper "An Alternative Approach to Predicting Corporate Bond Ratings," by Richard R. West. The author argues that West's dissection of a previous study has several weaknesses, including differences in the samples studied, the variables used and the orientation of each study. The author discusses each of these elements, bringing to light the conflicts that West introduces into the study of corporate bonds. Ultimately, the author finds that developing complex testing methods may be detrimental to the field before it is better understood.

The article presents a critique of a paper by O.K. Burrell entitled "Savings Bonds in Personal Investment Programs." Burrell recommended savings bonds as an effective investment tool for families. The author agrees with him but feels this may only be temporary and that the yield appeal of bonds will continue to diminish due to the long maturation for a bond versus other media. However, he adds that bonds can be a tax-free annuity and a valuable contribution to income during periods of financial stress.