Tax Distortions and Bond Issue Pricing

33 Pages Posted: 22 Feb 2016 Last revised: 14 Mar 2018

See all articles by Mattia Landoni

Mattia Landoni

Federal Reserve Bank of Boston

Date Written: October 1, 2017


Original issue premium (OIP) bonds are the norm in the U.S. tax-exempt market, but very rare in the taxable market. A tax subsidy helps explain this disparity. Unlike bonds issued at par or discount, the price of OIP bonds can fall and yet remain above par. Thus, secondary market buyers of tax-exempt OIP bonds receive relatively more tax-exempt coupon and less taxable market discount. Investors' aversion to taxable market discount explains additional, previously undocumented empirical facts. In a calibration exercise, this subsidy's expected cost to the U.S. Treasury is estimated at $1.7 billion per year.

Appendix is available at:

Keywords: municipal, bonds, tax-exempt, tax distortions, tax arbitrage, coupon, issue price

JEL Classification: G12, G32, G35, G38, H2

Suggested Citation

Landoni, Mattia, Tax Distortions and Bond Issue Pricing (October 1, 2017). Available at SSRN: or

Mattia Landoni (Contact Author)

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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