ABSTRACT This paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities. The tax loss consequences of default are recognized. Traditionally, tax‐free (municipal) bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk. While our model supports the linearity assumption, it implies that the slope and intercept are both functions of both the break‐even tax rate and the default probability(ies). Clientele effects among both municipal and taxable bonds are demonstrated. Finally, the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds.

In this paper we extend the recent work on the choice of input mix under uncertainty.In particular, we demonstrate that the qualitative nature of the disturbance term, along with the decision sequence, is a crucial determinant of the overall effect of uncertainty on the optimal input mix of a firm.Using general demand and production functions in conjunction with a mean-variance framework for financial valuation, we demonstrate the differential effects of systematic and non-systematic risk on the firm's choice of an optimal input mix.Consistent with earlier work in economics, this analysis demonstrates that uncertainty, regardless of the source, has important implications for the firm's choice of technology.

In this paper we extend the recent work on the choice of input mix under uncertainty. In particular, we demonstrate that the qualitative nature of the disturbance term, along with the decision sequence, is a crucial determinant of the overall effect of uncertainty on the optimal input mix of a firm. Using general demand and production functions in conjunction with a mean-variance framework for financial valuation, we demonstrate the differential effects of systematic and non-systematic risk on the firm's choice of an optimal input mix. Consistent with earlier work in economics, this analysis demonstrates that uncertainty, regardless of the source, has important implications for the firm's choice of technology.