TY - JOUR T1 - On the Relative Yields of Taxable and Municipal Bonds: <em>A Theory of the Tax Structure of Interest Rates</em> JF - The Journal of Fixed Income SP - 79 LP - 87 DO - 10.3905/jfi.2012.22.1.079 VL - 22 IS - 1 AU - Bradford D. Jordan Y1 - 2012/06/30 UR - https://pm-research.com/content/22/1/79.abstract N2 - The phrase “tax structure of interest rates” (also known as the “muni bond puzzle”) refers to the observed downwardsloping relation between tax rates implied by relative municipal and taxable yields and time to maturity. This article examines the impact of taxes on relative taxable and municipal bond yields and reveals that a tax structure of interest rates can appear to exist even when investor marginal tax rates are constant across maturities. As a consequence, the tax rate implied by relative bond yields can substantially and systematically understate the true rate, and the bias increases with maturity and interest rate volatility. The main conclusion is that, at least potentially, much (or even all) of the apparent tax structure of interest rates may simply be an illusion, and the muni bond puzzle may not be much of a puzzle.TOPICS: Fixed-income portfolio management, factor-based models, legal/regulatory/public policy ER -