Hostname: page-component-cd9895bd7-gvvz8 Total loading time: 0 Render date: 2025-01-05T14:00:54.906Z Has data issue: false hasContentIssue false
  • English
  • Français

Tax-Adjusted Duration for Amortizing Debt Instruments

Published online by Cambridge University Press:  06 April 2009

Duane Stock  and
Donald G. Simonson
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Baesel, J. B. “Adjusting Duration Estimates for Tax Payments.” Financial Review, 12 (1977), 28–35.CrossRefGoogle Scholar
Becketti, S. “Understanding Loan Sales.” Financial Letter, Kansas City Federal Reserve Bank, 13 (1987), 1–2.Google Scholar
Bierwag, G. O.Duration Analysis: Managing Interest Rate Risk. Cambridge, MA: Ballinger Publ. Co. (1987).Google Scholar
Bierwag, G. O.; Kaufman, G. G.; Schweitzer, R.; and Toevs, A.. “The Art of Risk Management in Bond Portfolios.” Journal of Portfolio Management, 7 (Spring 1981), 27–36.CrossRefGoogle Scholar
Brennan, M. J., and Schwartz, E. S.. “Duration, Bond Pricing, and Portfolio Management.” In Innovations in Bond Portfolio Management, Kaufman, G. G., Bierwag, G. O., and Toevs, A., eds. Greenwich, CT: JAI Press. (1983) 3–36.Google Scholar
Chambers, D. R.; Carleton, W. T.; and McEnally, R. W.. “Immunizing DeFault-Free Bond Portfolios with a Duration Vector.” Journal of Financial and Quantitative Analysis, 23 (03 1988), 89–104.CrossRefGoogle Scholar
Hessel, C. A., and Huffman, L. A.. “The Effects of Taxation on Immunization Rules and Duration Estimation.” Journal of Finance, 36 (12 1981), 1127–1142.CrossRefGoogle Scholar
Flannery, M. J., and James, C. M.. “The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions.” Journal of Finance, 39 (09 1984), 1141–1154.Google Scholar
Kalotay, A. “The After-Tax Duration of Original Issue Discount Bonds.” Journal of Portfolio Management, 11 (Winter 1985), 70–72.Google Scholar
Little, P. K. “Negative Cash Flows, Duration, and Immunization: A Note.” Journal of Finance, 39 (03 1984), 283–288.CrossRefGoogle Scholar
Pavel, C., and Phillis, D.. “Why Commercial Banks Sell Loans: An Empirical Analysis.” Economic Perspectives, Chicago Federal Reserve Bank, 11 (1987), 3–14.Google Scholar
Nelson, J., and Schaefer, S. M.. “The Dynamics of the Term Structure and Alternative Portfolio Immunization Strategies.” In Innovations in Bond Portfolio Management, Kaufman, G. G., Bierwag, G. O., and Toevs, A., eds. Greenwich, CT: JAI Press (1983), 239–265.Google Scholar
Van Home, J. C.Financial Market Rates and Flows. Englewood Cliffs, NJ: Prentice Hall (1984).Google Scholar
Yawitz, J. B. “The Relative Importance of Duration and Yield Volatility on Bond Price Volatility.” Journal of Money, Credit, and Banking, 9 (02 1977), 97–102.Google Scholar