THE TAX-ADJUSTED YIELD CURVE.

The article examines the tax-adjusted yield curve. Tax-induced bias can substantially alter the shape of the yield curve if it is constructed from quotations on bonds selling below par. The inclusion of tax effects can actually reverse qualitative conclusions concerning the direction in which investors expect interest rates to move under the expectations hypothesis. The article modifies the author's technique for regression fitting the term structure of interest rates, described in an earlier paper, to eliminate tax-induced bias and reconcile observations on high and low coupon bonds.