Coupon and tax effects on new and seasoned bond yields and the measurement of the cost of debt capital. (English) Zbl 1131.91347

Summary: A model of the tax structure of interest rates is developed and simple approximate expressions relating yield to coupon are derived. The effect on these simple expressions of alternative assumptions about holding period length, expectations of future interest rates, and other factors, is evaluated. It is shown that with recent U.S. yield averages the new-seasoned yield spread varies with the new-seasoned coupon spread as the theory prescribes. It is concluded that new issue yield averages should provide a more reliable measure of the cost of debt capital than is provided by seasoned yield averages.


91G10 Portfolio theory
91G30 Interest rates, asset pricing, etc. (stochastic models)
91B64 Macroeconomic theory (monetary models, models of taxation)
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