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: Suggested Citation