Makeham's Formula: Some Applications in Fixed Income Analysis

Research output: Working paperResearch

Abstract

Makeham's formula is an actuarial formula expressing the present value of a payment stream in terms of its repayments instead of the payments themselves. The formula is largely neglected in the finance literature, but -- as this paper shows -- it has a number of useful applications in fixed income analysis. We use Makeham's formula to decompose the return on a bond investment into interest payments, realized capital gains and accrued capital gains for a variety of accounting rules for measuring accruals in order to study the theoretical properties of these accounting rules, their taxation consequences and their implications for the relation between the yield before tax and the yield after tax. We also show how Makeham's formula produces short-cut expressions for the duration and convexity of a bond and facilitates the analytical calculation of the yield in certain cases.
Original languageEnglish
Place of Publicationwww
PublisherSSRN: Social Science Research Network
Number of pages30
Publication statusPublished - 2012

Keywords

  • Makeham's Formula
  • Duration
  • Convexity
  • Yield after Tax
  • Tax
  • Accued Capital Gains

Cite this

Astrup Jensen, B. (2012). Makeham's Formula: Some Applications in Fixed Income Analysis . www: SSRN: Social Science Research Network.
Astrup Jensen, Bjarne. / Makeham's Formula : Some Applications in Fixed Income Analysis . www : SSRN: Social Science Research Network, 2012.
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Astrup Jensen, B 2012 'Makeham's Formula: Some Applications in Fixed Income Analysis ' SSRN: Social Science Research Network, www.

Makeham's Formula : Some Applications in Fixed Income Analysis . / Astrup Jensen, Bjarne.

www : SSRN: Social Science Research Network, 2012.

Research output: Working paperResearch

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Astrup Jensen B. Makeham's Formula: Some Applications in Fixed Income Analysis . www: SSRN: Social Science Research Network. 2012.