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

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  • Andrew Derry
  • Mahmood Pradhan

Abstract

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 - divergences between yield curves of the main categories of tax payers are found to remain.

Suggested Citation

  • Andrew Derry & Mahmood Pradhan, 1993. "Tax Specific Term Structures of Interest Rates in the UK Government Bond Market," Bank of England working papers 11, Bank of England.
    • Handle: RePEc:boe:boeewp:11
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1993/wp11.pdf
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    References listed on IDEAS

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    1. Bayoumi, Tamim, 1993. "Financial Deregulation and Household Saving," Economic Journal, Royal Economic Society, vol. 103(421), pages 1432-1443, November.
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    Cited by:

    1. Schich, Sebastian T., 1996. "Alternative Spezifikationen der deutschen Zinsstrukturkurve und ihr Informationsgehalt hinsichtlich der Inflation," Discussion Paper Series 1: Economic Studies 1996,08, Deutsche Bundesbank.
    2. Clive Briault & Andrew Haldane & Mervyn A. King, 1997. "Independence and Accountability," Palgrave Macmillan Books, in: Iwao Kuroda (ed.), Towards More Effective Monetary Policy, chapter 10, pages 299-340, Palgrave Macmillan.
    3. Marco Bianchi & Gylfi Zoega, 1998. "Unemployment persistence: does the size of the shock matter?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 283-304.
    4. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    5. Marco Bianchi, 1996. "A Comparison of Methods for Seasonal Adjustment of the Monetary Aggregates," Bank of England working papers 44, Bank of England.
    6. Charles Nolan & Eric Schaling, 1996. "Monetary Policy Uncertainty and Central Bank Accountability," Bank of England working papers 54, Bank of England.
    7. Francis Breedon & Ian Twinn, 1995. "Valuation of underwriting agreements for UK rights issues: evidence from the traded option market," Bank of England working papers 39, Bank of England.
    8. Mark S Astley & Andrew G Haldane, 1995. "Money as an Indicator," Bank of England working papers 35, Bank of England.
    9. Andy Haldane & Bennett McCallum & Chris Salmon, 1996. "Base Money Rules in the UK," Bank of England working papers 45, Bank of England.
    10. Roger Beaton & Paul Fisher, 1995. "The Construction of RPIY," Bank of England working papers 28, Bank of England.
    11. Prasanna Gai, 1996. "International Bank Lending to LDCs - an Information-Based Approach," Bank of England working papers 43, Bank of England.
    12. Schich, Sebastian T., 1996. "Alternative specifications of the German term structure and its information content regarding inflation," Discussion Paper Series 1: Economic Studies 1996,08e, Deutsche Bundesbank.
    13. Marco Bianchi, 1995. "Testing for convergence: evidence from non-parametric multimodality tests," Bank of England working papers 36, Bank of England.
    14. Nicola Anderson & Francis Breedon, 1996. "UK Asset Price Volatility Over the Last 50 Years," Bank of England working papers 51, Bank of England.
    15. Matthew B Canzoneri & Charles Nolan & Anthony Yates, 1996. "Feasible Mechanisms for Achieving Monetary Stability: a Comparison of Inflation Targeting and the ERM," Bank of England working papers 52, Bank of England.
    16. Spencer Dale & Marco Rossi, 1996. "A Market for Intra-day Funds: Does it Have Implications for Monetary Policy?," Bank of England working papers 46, Bank of England.
    17. David Barr & Bahram Pesaran, 1995. "An assessment of the relative importance of real interest rates, inflation and term premia in determining the prices of real and nominal UK bonds," Bank of England working papers 32, Bank of England.
    18. James Proudman, 1995. "The Microstructure of the UK gilt market," Bank of England working papers 38, Bank of England.
    19. Sterne, Gabriel & Bayoumi, Tamim, 1995. "Temporary Cycles or Volatile Trends? Economic Fluctuations in 21 OECD Economies," The Manchester School of Economic & Social Studies, University of Manchester, vol. 63(1), pages 23-51, March.

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