The expectations theory of the term structure is well known to give wrong signals as to the future course of long-term interest rates. One explanation involves rational time-varying term premia. However, the “anomaly” may also be due to inflation forecast errors. We study survey forecasts of inflation. It seems that the respondents' forecasts are insufficiently adaptive. Interest rates reflect expectations similar to the inflation forecasts. As a result, past survey forecast errors reliably predict premia on U.S. Government Bonds.

Previous research has separately addressed the problem of estimating risk in the presence of infrequent trading and the problem of estimating quality-adjusted returns in markets with quality variation in the observed price series. This paper simultaneously addresses both problems by applying a signal extraction method for unequally spaced data to decompose the observed price series with varying times between transactions into a quality-adjusted, permanent component (which would be observable in the absence of quality variation) plus a stationary, transitory quality variation component. Stamp auction transaction prices provide an application. Auction quality grading is treated in a manner analogous to bond ratings. Almost all of the observed variance is attributed to the auction quality variation. The observed auction returns and stock index returns are not well related.

Lease valuation models often begin with the assumption that leases and debt are substitutes. This paper demonstrates that, because leasing is a mechanism for selling excess tax deductions, it can motivate the lessee firm to increase the proportion of debt in its capital structure relative to an otherwise identical firm that does not use leasing. Thus, debt and leases can be complements. We also show that a competitive lessor will use diversification to reduce risk and increase the probability that tax deductions are fully utilized so that it can lower lease payments.