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Corporate Supply of Index Bonds

Listed author(s):
  • Stanley Fischer
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    This paper develops a simple theory of the supply of index bonds by a firm, and uses that model to examine in some detail possible reasons for the non-existence of privately issued index bonds in the United States. The major elements of the theory involve the trade-off between the tax advantages of using debt finance and the increasing risk of bankruptcy debt finance involves. The theory is first used to examine the supply of nominal bonds -- it is thus a theory of the debt-equity ratio. Then the firm's optimal supply of index bonds is examined, and the values of the firm using the alternative debt instruments is compared. In general, there is no reason to think that nominal bonds dominate index bonds -- i.e. the theory cannot explain why firms have not issued index bonds. The paper then turns to a number of other reasons that have been advanced for the non-issue of indexed bonds in the United States, such as the tax treatment of such instruments and the argument that their issue would saddle the firm with open-ended obligations.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0331.

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    Date of creation: Mar 1979
    Publication status: published as Fischer, Stanley. "On the Nonexistence of Privately Issued Index Bonds inthe U.S. Capital Market." Inflation, Debt, and Indexation, edited by Rudiger Dornbusch and Mario Henrique Simonsen. Cambridge: M.I.T. Press, (1983),pp. 223-246.
    Handle: RePEc:nbr:nberwo:0331
    Note: PE
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    1. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    2. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-282, June.
    3. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-922, September.
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