This paper provides a new explanation for why closed-end bond funds coexist along with otherwise identical open-end bond funds. Closed-end bond funds offer investors the opportunity to leverage their fixed income investment at very low borrowing rates and are attractive to investors for this reason. We find that differences in leverage are reflected in the discount on closed-end bond funds in a manner consistent with the advantage of leverage.

A number of articles in financial economics have used quarterly or semi-annual mutual fund holdings data to test hypotheses about investment manager behavior. This article reexamines four well-known hypotheses in finance to determine whether the results of prior tests of these hypotheses remain valid when higher frequency (monthly) holdings data are employed. The areas examined are: momentum trading, tax-motivated trading, window dressing, and tournament behavior. We find that the use of monthly holdings data rather than quarterly holdings data or, in the case of tournament behavior, holdings data rather than monthly return data, change, and in some cases reverse, previous results. This occurs because monthly holdings data capture a large number of trades missed by quarterly data (18.5% of the trades) and permit a more precise estimation of the timing of trades.

An important body of literature in Financial Economics accepts bond ratings as a sufficient metric for determining homogeneous groups of bonds for estimating either risk-neutral probabilities or spot rate curves for valuing corporate bonds. In this paper we examine Moody’s and Standard & Poors ratings of corporate bonds and show they are not sufficient metrics for determining spot rate curves and pricing relationships. We investigate several bond characteristics that have been hypothesized as affecting bond prices and show that from among this set of measures default risk, liquidity, tax liability, recovery rate and bond age leads to better estimates of spot curves and for pricing bonds. This has implications for what factors affect corporate bond prices as well as valuing individual bonds.

ABSTRACT Empirical studies of the modern theories of bond pricing typically choose proxies for the state variables in a rather arbitrary fashion. This paper empirically analyzes the question of the optimal spot rates to use as state variables. Our findings indicate that the four‐year spot rate serves as the best proxy in the one‐state‐variable model. In the case of the two‐state‐variables model, the six‐year rate and eight‐month rate are identified as best. Tests of the out‐of‐sample prediction ability indicate that our model is superior to Macaulay's duration model and alternative proxies for state variables.

ABSTRACT S&P 500 index funds represent one of the simplest vehicles for examining rational behavior. They hold virtually the same securities, yet their returns differ by more than 2 percent per year. Although the relative returns of alternative S&P 500 funds are easily predictable, the relationship between cash flows and performance is weaker than rational behavior would lead us to expect. We show that selecting funds based on low expenses or high past returns outperforms the portfolio of index funds selected by investors. Our results exemplify the fact that, in a market where arbitrage is not possible, dominated products can prosper.

ABSTRACT The purpose of this article is to explain the spread between rates on corporate and government bonds. We show that expected default accounts for a surprisingly small fraction of the premium in corporate rates over treasuries. While state taxes explain a substantial portion of the difference, the remaining portion of the spread is closely related to the factors that we commonly accept as explaining risk premiums for common stocks. Both our time series and cross‐sectional tests support the existence of a risk premium on corporate bonds.