TY  - JOUR
AU  - Fischer,Stanley
TI  - Corporate Supply of Index Bonds
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 331
PY  - 1979
Y2  - March 1979
UR  - http://www.nber.org/papers/w0331
L1  - http://www.nber.org/papers/w0331.pdf
N1  - Author contact info:
Stanley Fischer
Governor
Bank of Israel
One Kaplan Street
Jerusalem 91007
ISRAEL
Tel: 9722-655-2701
Fax: 9722-652-8419
E-Mail: sfischer@bankisrael.gov.il
AB  - 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.
ER  -