Tax Specific Term Structures of Interest Rates in the UK Government Bond Market

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 01 April 1993

Working Paper No. 11
By Andrew Derry and Mahmood Pradhan

Coupon income and capital gain on UK Government bonds are taxed differently, so some investors do not regard all bonds as perfect substitutes. This paper examines the extent to which term structures of interest rates derived from the UK bond market are tax specific, using a linear programming technique to select the optimal portfolios for investors facing different tax treatment. Despite the tax reforms of the mid-nineteen eighties - designed to reduce arbitrage opportunities in the gilts market - we find that divergences between yield curves of the main categories of taxpayers remain. 

PDFTax specific term structures of interest rates: evidence from the United Kingdom government bond market

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