OPTIMAL BOND TRADING WITH PERSONAL TAXES

George Constantinides and Jonathan E. Ingersoll
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Jonathan E. Ingersoll: Yale University, New Haven, CT 06520, USA

Chapter 6 in Theory of Valuation, 2005, pp 165-206 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractTax considerations governing bondholders' optimal trading include: capital loss realization; capital gain deferment; change of the long-term holding period status to short-term by sale of the bond and repurchase, to realize future losses short-term; raising the basis above par by sale of the bond and repurchase, to deduct the amortized premium from ordinary income. The optimal policy which incorporates transactions costs and conforms to the IRS code substantially differs from the buy-and-hold and continuous-realization policies. Failure to account for optimal trading may seriously bias econometric estimation of the yield curve and the tax bracket of the marginal bondholders.

Keywords: Asset Pricing; Financial Theory; Valuation; Term Structure; Interest Rates; Options; Portfolios; Taxes; Transaction Costs (search for similar items in EconPapers)
Date: 2005
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Related works:
Journal Article: Optimal bond trading with personal taxes (1984)
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