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

Bank of England Working Paper No 11

Posted: 1 Jul 1998

Date Written: April 1993

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.

JEL Classification: E43, G12

Suggested Citation

Derry, Andrew and Pradhan, Mahmood, Tax Specific Term Structures of Interest Rates in the UK Government Bond Market (April 1993). Bank of England Working Paper No 11, Available at SSRN: https://ssrn.com/abstract=93588

Andrew Derry (Contact Author)

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mahmood Pradhan

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

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