The Impact of Taxes on Discount Bond Valuation and Risk

Roger P Bey and Larry J Johnson

The Financial Review, 1989, vol. 24, issue 4, 589-97

Abstract: If the effective tax rates on ordinary income and capital gains are identical, the assumption of independence or dependence between ordinary income and capital gains tax rates is shown to have no impact on discount bound valuation or risk. However, even if the effective tax rates are identical, the shape and the sensitivity of the bond valuation and risk functions with respect to taxes are not identical under the alternative assumptions. A mathematical and numerical analysis of the sensitivity of changes in discount bound valuation and risk functions with respect to income tax rates is provided. Comparisons between the sensitivities of changes in the discount bond valuation and risk functions and taxes under conditions of dependence or independence between ordinary income and capital gains tax rates are made. Copyright 1989 by MIT Press.

Date: 1989
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