A research article prepared in the Bank's Economic Section, largely by J. P. Burman
An article in the December 1972 Bulletin introduced a new method of fitting time yield curves to the yields on gilt-edged stocks. A feature of the new system is that for the first time it makes specific allowance for the effect of coupon on yield. Low-coupon stocks in general command a lower gross redemption yield, because they offer a larger tax-free capital gain to most investors. The calculated curve indicates the nominal rate of interest appropriate for a stock of any given maturity priced at 100. This is called a 'par' yield curve. Since December, some evidence has accumulated that the method employed is not a satisfactory representation of the relation between coupons and yields of stocks with nearly equal maturity.