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Optimal Bond Trading with Tax Clienteles: A Discrete-Time Dynamic Trading Model

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  • Tian, Yisong

Abstract

This study develops a discrete-time dynamic trading model for bond pricing under differential taxation. The model incorporates both the tax-timing option effect and the tax-clientele effect. Investors from all tax brackets have a chance to bid for a bond and the marginal investor is the one who is willing to pay the highest price. Simulation results show that interbracket trading occurs frequently as the interest rate changes, which enhances the value of the tax option. These results are shown to be robust to changes in interest rate process and tax regimes. Copyright 1996 by MIT Press.

Suggested Citation

  • Tian, Yisong, 1996. "Optimal Bond Trading with Tax Clienteles: A Discrete-Time Dynamic Trading Model," The Financial Review, Eastern Finance Association, vol. 31(2), pages 313-341, May.
    • Handle: RePEc:bla:finrev:v:31:y:1996:i:2:p:313-41
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    Cited by:

    1. Marco Realdon, 2010. "After‐tax Valuation of Convertible Bonds and Participation Exemption," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 39(3), pages 147-171, November.

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