Personal Taxes, Market Liquidity and Corporate Bond Credit Spreads

• Main Authors: Wan-ping Yan, 顏菀平
• Other Authors: Hong-Ren Huang
• Format: Others
• Language: zh-TW
• Published: 2012
• Online Access: http://ndltd.ncl.edu.tw/handle/16129546074135393059

碩士 === 國立中央大學 === 財務金融研究所 === 100 === Liu, Qi, and Wu (2006) find that if they propose the term structure model of credit spreads to incorporate the effects of personal taxes, tax premium explains a substantial portion of bond’s yield spreads. He and Xiong (2011) also find that deterioration of debt market liquidity not only leads to an increase in liquidity premium of corporate bonds but also firm’s credit risk, and also leads bond’s yield spreads to increase. We build on the term structure model of Leland and Toft (1996) by adding the effects of personal taxes and the effects of debt market liquidity, and assess their impact on corporate bond yield spreads, default boundary and rollover losses. Our model not only points an interaction between liquidity premium and default premium but also extends an interaction between tax premium and default premium. Our model shows that the magnitude of rollover loss increases with bond holder’s liquidity shock intensity, the firm’s default boundary increases with bond holder’s liquidity shock intensity, and credit spread of the firm’s newly issued bond increases with bond holder’s liquidity shock intensity. Our model also shows that the magnitude of rollover loss increases with the personal income tax rate, the firm’s default boundary decreases with the personal income tax rate, and credit spread of the firm’s newly issued bond increases with the personal income tax rate. So we represents that the predictive ability of the model for bond’s yield spreads is much improved when personal tax effects and bond market liquidity effects are accounted for., and also justifies personal tax and debt market liquidity as predictors of firm defaults.