Knowledge that Transforms

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This paper models the unobservable rate of return on money balances (r) as depending directly on the transactions velocity of money (ν). Approximating this relationship linearly, the efficient markets hyphothesis (EMH) is shown to imply that first differences of the log of ν should either be random or should show negative first-order serial correlation at most. The empirical evidence presented below is consistent with the EMH.

Louis O. Scott, The Stationarity of the Conditional Mean of Real Rates of Return on Common Stocks: An Empirical Investigation, The Journal of Financial and Quantitative Analysis, Vol. 19, No. 2 (Jun., 1984), pp. 217-230

Richard H. Bernhard, Risk-Adjusted Values, Timing of Uncertainty Resolution, and the Measurement of Project Worth, The Journal of Financial and Quantitative Analysis, Vol. 19, No. 1 (Mar., 1984), pp. 83-99

This paper reexamines the empirical relation between inflation and interest rates concentrating on the tax effect proposed by Darby and Feldstein. Using the random walk intercept model, relative responses of taxable yields and tax-exempt yields to expected inflation are estimated. The results show that for the sample period 1953–1982, the nominal yields on Treasury bills rise at a rate greater than one-for-one with expected inflation, while the nominal yields on default-free municipal bonds rise approximately one-for-one with expected inflation. Thus, the tax-adjusted Fisher hypothesis by Darby and Feldstein is empirically supported. The components of Treasury bills are also extracted and their variances are compared. It is shown that variation of expected inflation is not overwhelmingly larger than that of the after-tax real rate. Therefore, on an after-tax basis, changes in the real rate explain a substantial portion of changes in the nominal rate of interest.

Since Bowlin's [4] original article on the topic was published, a considerable literature on corporate bond refunding has developed. Most of that literature has concentrated on the question of how to measure the benefit to a company's shareholders of exercising the call provision associated with an outstanding debt issue (see [3], [12], [21], [26], [27], [29], and [31]). Among the related concerns have been the matters of whether there are valuation advantages to the deliberate issuance of discount—including “zero coupon”—bonds (see [9], [22], and [28]), and whether there can be profitable opportunities for refunding prior to maturity debt instruments that were issued at par but later trade at a discount (see [1], [2], [13], [15], [17], [18], and [23]).

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In this paper, a general treatment of identifying the set of unbiased estimators of N-period mean returns is advanced and a new unbiased estimator, which promises near-minimum variance and minimal computation, is formulated. The new estimator is also equally applicable to other processes of compound growth.

In recent articles, Myers, Dill, and Bautista [15] (MDB) and Franks and Hodges [7] (FH) provide valuable contributions to the leasing literature. MDB derive a simple formula for lease valuation in a Modigliani-Miller world with corporate taxes. The paper by FH presents a simpler derivation of the same formula. FH also extend MDB's analysis to consider the empirically significant case of a lessee company currently in a non-tax-paying position, but which expects to resume paying taxes at some (specified) future date. The work of FH is important here in laying bare the economics of leasing. Temporary non-tax-paying lessees joining tax-paying lessors in non-zero-sum contracts; however, their paper leaves the problem as a programming application. This paper explores the difference equations underlying the MDB-FH approach for finding the adjusted present value of the lease contract. It is found that the order of the system of difference equations depends on the treatment of taxation complexities. Also described is a simple procedure for solving these higher-order difference equations to find the appropriate adjusted discount rates to use in MDB's lease valuation formula, extending its application to these more complex tax situations. The paper is set out in six sections.