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Tax-Adjusted Duration for Amortizing Debt Instruments

Published online by Cambridge University Press:  06 April 2009

Duane Stock  and
Donald G. Simonson
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Abstract

This research provides improved techniques for analyzing the after-tax risk exposure of taxable institutions holding amortizing instruments such as commercial, real estate, and consumer loans. We derive after-tax duration for amortizing instruments and analyze it for sensitivity to tax rates, coupon, and maturity. Taxable investors who hedge and ignore the effects of taxes on amortizing instruments will underestimate differences in durations on bonds versus amortizing instruments of equal maturities; bond durations increase much faster as tax rates increase. One unexpected result shows that, unlike bond duration, amortizing instrument duration often increases with coupon rate, and sometimes is independent of coupon rate.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 3 , September 1988 , pp. 313 - 327
Copyright
Copyright © School of Business Administration, University of Washington 1988

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