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.
|Number of pages||30|
|Publication status||Published - 2013|
|Event||2013 Midwest Economics Association Annual Meeting - Columbus, OH, United States|
Duration: 22 Mar 2013 → 24 Mar 2013
|Annual Meeting||2013 Midwest Economics Association Annual Meeting|
|Period||22/03/2013 → 24/03/2013|
|Sponsor||Midwest Economics Association|