Many futures contracts contain a delivery option, which allows the short position a choice to deliver one of several varieties of a commodity. Several authors have argued that delivery options can have considerable value. For a forward contract with a delivery option, this paper shows that a continuously adjusted hedge will drive the value of the delivery option towards zero, assuming perfect and frictionless markets.

In recent years, increased interest has developed in municipal bonds. This interest seems to be related to higher levels of interest rates, higher marginal tax rates for individuals because of inflation, and large demand for capital funds by municipalities. In spite of this greater awareness of municipal bonds, the academic literature lacks a rigorous analysis comparing municipal bonds with other bonds. The purpose of this paper is to partially fill this gap. Since one major characteristic differentiating municipal bonds from other bonds is the (federal) tax-free status of the coupons on municipals, this paper will trace out the implications of this differential tax treatment by comparing municipal bonds with fully-taxed bonds.

My paper, “The Pricing of Premium Bonds [2], ” is the first to show deductively that the taxation of premium bonds makes it possible for yield to maturity to reach a maximum at par. My paper also supports this analytical result with empirical examples.

Miles Livingston, Taxation and Bond Market Equilibrium in a World of Uncertain Future Interest Rates: Reply, The Journal of Financial and Quantitative Analysis, Vol. 16, No. 5 (Dec., 1981), pp. 779-781

In the literature dealing with bond price volatility, there have been two divergent approaches. On the one hand, theoretical papers have looked at bond price volatility in the instantaneous framework of the calculus. Using the derivative of bond price (P) with respect to yield to maturity (y), it has been shown that volatility is linearly related to this derivative (dP/dy). (See [10].)

Throughout the finance and economics literature, it is widely recognized that taxation can significantly alter individual behavior and market equilibrium conditions. Yet, in the area of bonds, the impacts of taxation upon bond pricing have generally been ignored. The primary purpose of this paper is to trace out the impact of differential taxation of regular income and capital gains upon the pricing of coupon-bearing bonds.

In a recent paper, the author [8] has derived the equilibrium bond pricing equation in a world of uncertain future interest rates assuming that capital gains and losses will be taxed at maturity at capital gains tax rates. In the case of premium bonds (i.e., bonds selling above par), the U.S. tax law allows bondholders to elect to amortize the premium on a straight line basis as a deduction from regular taxable income. For those paying positive tax rates, the amortization option will generally be advantageous compared to taking a capital loss at maturity.

A student of financial theory must always assume that managers will follow a course of action that will lead to a higher value of the firm rather than a lower value, given a choice between two courses of action. Yet, Lewellen and Racette (hereafter LR) in a recent paper [1] comparing the sale of convertible debentures with the sale of straight debt assumed that managers will behave in a way that will lead to submaximal firm value. The purpose of this paper is to correct the LR error.