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The article reports on the pricing of municipal bonds in the U.S. Tax laws in the U.S. state that municipal bonds have coupons that exempt federal taxes. Municipal bonds are compared with fully-taxed bonds to trace the implications of the differential tax treatment. Fully-taxed bonds have coupons which are subject to taxes at the regular income rate with capital gains also subject to taxation. If a municipal bond is purchased at a discount from par it contains a capital gain which is taxed at maturity for individuals. Municipal bonds which are purchased at a premium that is above par and it is held to maturity than no capital loss is allowed for individuals.

The default of a major corporation or municipality generates debate over the impact these failures have on the borrowing cost of other issuers. Theory suggests that in efficient markets individual failures by themselves should not increase the level of interest rates in a market unless the default provides unanticipated information about other issuers. The default of New York City in the summer of 1975 was believed by many to have provided information that increased the perceived risk of investors and consequently increased new issue borrowing costs in the municipal bond market. Empirical research by Forbes and Peterson and Gramlich supports this contention, reporting that borrowers paid as much as 119 basis points more because of the New York City crisis. A study by Hoffland suggests that the impact of the default was not just temporary, but was felt long after 1975. Though less scientific, others note that during 1975 municipal borrowing costs rose to record high levels with most issues carrying their interest cost during the summer of 1975. We find the above results surprising in that the default of a single municipality could have such a large and long-lasting impact on the borrowing cost of other issuers. Recent evidence by Kidwell and Trzcinka using macroeconomic data concludes that neither the New York City nor the Penn-Central defaults by themselves led to an increase in the risk structure of interest rates in their respective markets. However, evidence exists that suggests that the municipal bond market may be segmented between national and regional markets. If this is true, it is possible that the New York City default influenced a certain subset of bond issuers and that this influence is concealed by the aggregate data employed in previous studies. The purpose of this study, therefore, is to examine whether the New York City default by itself: 1) increased the borrowing cost of individual bond issuers; and 2) whether the effects of the default varied betw [ABSTRACT FROM AUTHOR]

The article reports on the costliness of inefficient coupons on municipal bonds. Capitalists and financiers buy more municipal bonds which sell close to their par value which is the lowest yield but with a coupon enabling its sale near par value. Also, investors try to make the marginal utility per dollar that is invested in each bond equal. However, coupon payments on municipal bonds are costly to the investor as opposed to U.S. Treasury or corporate bonds.

This article presents information on the determinants of municipal bond yields. The author examines the determinants of the structure of municipal bond yields and provides empirical evidence from tests that were conducted to measure the impact of these factors on the yields. The author is interested in understanding why the yields from one state may be different from another state's bond yields. The findings indicate that bond yields are a result of the bond's default risk and marketability. The author discusses the situations where each of these factors plays the more significant role.