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Taxation and Bond Market Equilibrium in a World of Uncertain Future Interest Rates: Comment

Published online by Cambridge University Press:  06 April 2009

Stephen M. Schaefer
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Extract

In a recent paper [3], Livingston analyzes the relationship between bond prices and market discount rates in a market with taxes, but which is otherwise frictionless. Two main cases are addressed. In the first, all investors are assumed to be in the same tax bracket and a relationship [17] is derived between the price of a bond, the rates of tax on income and capital gains, and the aftertax term structure. In a subsequent section, it is claimed that, when the assumption of a common tax bracket is removed, but maintaining the frictionless market assumption, the analysis is more or less unchanged:

”..there must still be a unique price of an annuity of maturity j and a unique price of a discount note of maturity j. There will be implicit tax rates in these annuities and discount notes for each maturity.… The bond pricing equation is the same except that TP and TG are replaced by TPj. and TGj., implicit marginal tax rates for each maturity” [3, p. 20].

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 16 , Issue 5 , December 1981 , pp. 773 - 777
Copyright
Copyright © School of Business Administration, University of Washington 1981

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References

REFERENCES

[1]Brennan, M. J. “Taxes, Market Valuation and Corporate Financial Policy.” National Tax Journal, Vol. 23 (1970), pp. 417–427.CrossRefGoogle Scholar
[2]Litzenberger, R. L., and Ramaswamy, K.. “The Effect of Personal Taxes and Dividends on Capital Asset Prices.” Journal of Financial Economics, Vol. 7 (1979), pp. 163–195.CrossRefGoogle Scholar
[3]Livingston, M. “Taxation and Bond Market Equilibrium in a World of Uncertain Future Interest Rates.” Journal of Financial and Quantitative Analysis, Vol. 14, No. 1 (03 1979), pp. 11–27.Google Scholar
[4]McCulloch, J. H. “The Tax-Adjusted Yield Curve.” Journal of Finance, Vol. 30 (06 1975), pp. 811–830.Google Scholar
[5]Schaefer, S. M. “Taxes and Security Market Equilibrium.” In Financial Economics: Essays in Honor of Paul H. Cootner, Sharpe, W. F., ed. Englewood Cliffs, N.J.: Prentice-Hall (forthcoming).Google Scholar