A SIMPLE FORMULA FOR DURATION

This paper presents a simplification of Macaulay's formula for duration. The derivation treats any bond as a portfolio of a coupon bearing bond at par and a zero-coupon bond. The resultant equations are simple to use and show how coupon payments, premiums, and discounts affect duration. The equations are easily modified without loss of simplicity for various coupon payment intervals and for calculations between payment periods.     

Tax Shields,Sample-Selection Bias,and the Information Content of Conversion-Forcing Bond Calls

The information content of conversion-forcing bond calls depends on the after-tax cash flow to bondholders. If the dividend after conversion exceeds the after-tax coupon but is less than the before-tax coupon, the call reveals unanticipated decreases in dividends and/or earnings that reduce the tax shield from interest payments. In contrast, a call when the dividend is less than the after-tax coupon reveals the timing of an anticipated shift from exceptional firm-specific positive growth to the industry norm. Efforts to document properties of convertible calls are subject to sample-selection bias because calls are disproportionately associated with positive pre-call firm-specific growth.     

Tax-Induced Intra-Year Patterns in Bonds Yields

The ratio of the yields on short-term tax-exempt and taxable bonds exhibits a sawtooth pattern that is consistent with the impacts of tax deferments from dates on which interest payments are received to dates on which the resulting tax payments are paid. The effect of the tax deferment at turns of calendar years does not differ appreciably from the effect at the turn of any other tax quarter. Investors with tax payment schedules that differ from that of the investor that is indifferent between investing in taxable and tax-exempt bonds may benefit from tax-related timing strategies for investing in these bonds. Issuers may benefit from tax-related timing strategies for scheduling interest payments.     

Bond indenture provisions and the risk of corporate debt

This paper examines the effect of alternative bond indenture provisions on the allocation of risk among the firm's claimants. The approach taken here differs from that of earlier studies in that risk allocation is examined while the firm's leverage (in market value terms) is held constant. In this context, four indenture provisions are examined: (1) the time to maturity, (2) the promised payment schedule, (3) financing restrictions and (4) priority rules. It is concluded that risk is transferred from stockholders to bondholders as the time to maturity and promised payment increase appropriately. Furthermore substitution of longer-term debt for an equal amount of shorter-term debt also increases the risk to bondholders while decreasing the risk to stockholders. The analysis shows that a coupon bond can be represented by a unique discount bond with the same risk and value. This permits the characterization of the effective maturity of a risky debt issue, a concept analogous to the stochastic duration of a default-free coupon bond. These results are shown to be independent of the means used to finance the debt issue. Finally, it is concluded that the relative risk associated with different bonds issued by the same firm cannot be determined by the structure of priority rules alone. It is also necessary to consider the timing of the promised payments compared to that of the other debt issues in the firm's capital structure.     

Debt Management under Corporate and Personal Taxation

The presence of long-term debt in a corporation's capital structure is shown to give rise to a valuable tax-timing option that can be exercised by the firm on behalf of its shareholders. This option, which is not available if the firm is fully equity financed, implies that leverage will have a positive tax effect on total firm value even if there is no such effect associated with the tax deductibility of the coupon interest payments on debt. The more volatile interest rates and bond prices are, the more valuable the tax-timing option and the larger the favorable impact of debt on shareholder wealth.     

The Optimal Write-Down Coefficients in a Percentage for a Catastrophe Bond

Catastrophe bonds, also known as CAT bonds, are insurance-linked securities that help to transfer catastrophe risks from insurance industry to bond holders. When the aggregate catastrophe loss exceeds a specified amount by the maturity, the CAT bond is triggered and the future bond payments are reduced. This article first presents a general pricing formula for a CAT bond with coupon payments, which can be adapted to various assumptions for a catastrophe loss process. Next, it gives formulas for the optimal write-down coefficients in a percentage, implemented by Monte Carlo simulations, which maximize two measurements of risk reduction, hedge effectiveness rate (HER) and hedge effectiveness (HE), respectively, and examines how the optimal write-down coefficients in a percentage help reinsurance or insurance companies to mitigate extreme catastrophe losses. Last, it demonstrates how the number of coupon payments, loss share, retention level, strike price, maturity, frequency, and severity parameters of the catastrophe loss process and different interest rate models affect the optimal write-down coefficients in a percentage with numerical examples for illustrations.     

基于多项式样条函数的我国零息票收益率曲线构造

零息票收益率曲线是利率期限结构理论分析的基础,在金融估价和风险管理中发挥着重要作用。提出基于多项式样条函数构造零息票收益率曲线的过程及改进方法:考虑国债采样日位于付息日之间、年付息次数可变的情形,使分析更具一般性;针对多项式样条函数拟合时回归系数不显著的问题,采取剔除不显著变量的方法进行改进;讨论比较了两种样条值确定方法在我国的适用性,并研究了模型的稳定性。选取上交所国债进行的实证研究表明,在现阶段我国国债样本数据较少、结构不甚合理的情况下,采用剔除不显著变量的三段三次样条函数可以较好地构造我国的零息票收益率曲线。     

Ex-Day Behavior When Investors and Professional Traders Assume Reverse Roles: The Case of Danish Lottery Bonds

Lottery bonds are Danish Treasury obligations which make coupon payments by lottery. Professional traders have a tax preference for the coupon lottery, while investors are tax-neutral and take the other side of the trade. Consistent with tax-based explanations of abnormal ex-day returns, we find that prices fall by more than the lottery mean. Surprisingly, we also find that the price drop over the lottery decreases with the lottery variance. This suggests that investors do not like the lottery. In fact, the Danish Treasury has been able to sell more lottery bonds only by offering above market interest rates. Journal of Economic Literature Classification Numbers: G12, G35, G63.     

Does rising corporate social responsibility promote firm tax payments? New perspectives from a quantile approach

Studies of the linkage between CSR and firms' tax payment often use mean regression strategies and focus on developed economies. Using panel data from Vietnamese firms, this study finds that CSR has insignificant effects on firm tax payments when applying fixed-effect instrumental variable estimations. Using a quantile approach, however, this paper finds that CSR improves firm tax payment at a higher percentile but is negatively linked to enterprises with low tax payment, a result driven by several mechanisms. First, high adherence to CSR increases firms' compliance with the law. Also, although high adherence to CSR does not immediately promote transparency in the business environment, it does improve firm profitability and value added. This suggests that in the absence of effective institutions, firms can engage in the effort against tax avoidance and promote tax payment by applying CSR practices.     

Liquidity-saving mechanisms in collateral-based RTGS payment systems

This paper studies banks’ incentives regarding the timing of payment submissions in a collateral-based RTGS payment system and how these incentives change with the introduction of a liquidity-saving mechanism (LSM). We show that an LSM allows banks to economise on collateral while also providing incentives to submit payments earlier. This is because in our model an LSM allows payments to be matched and offset in real time without any or very minimal funds. Under a collateral-based RTGS payment system, introduction of the LSM always improves welfare. The result contrasts with earlier work, which shows that under a fee-based RTGS system, the introduction of an LSM in some circumstances may reduce welfare.     

Do investors care about corporate taxes?

This paper conducts a comprehensive examination of the link between corporation tax payment and financial performance in the UK. We find no discernible link between tax rates and stock returns for the UK, no matter how tax payment is measured. This is true throughout the sample period and for both customer-facing and non-customer-facing companies. However, allowing for industry norms and a host of firm characteristics, companies with lower effective tax rates have significantly higher levels of stock market risk. Firms that are reported in the newspapers in a negative way in relation to their level of corporation tax payment experience small negative stock returns, which are partially reversed within a month. However, the initial negative effects and subsequent rebound are both more pronounced for smaller companies. News announcements of the potential involvement of a firm in a corporate inversion (expatriation) result in steeper and much longer-lasting falls in share prices, whereas news stories of a more general nature relating to a firm's tax avoidance or tax payments have little noticeable effect.     

An International Study of Tax Effects on Government Bonds

It is shown that coupon bonds alone are not sufficient to span time-dated claims on ordinary income, capital gains, and non-taxable wealth. In an incomplete bond market where the pure dated claims are not spanned by existing bonds, marginal rates of substitution between present consumption and pure dated claims on ordinary income, capital gains income, and non-taxable wealth, respectively, can differ across bondholders. However, the relative pricing of coupon bonds in each of these countries is shown to be consistent with the tax status of the major (non-tax-exempt) holders of government debt.     

Taxes on Tax‐Exempt Bonds

Implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates, with implicit tax rates close to 100% using retail trades and above 70% for interdealer trades. These implied tax rates can be identified because a portion of secondary market municipal bond trades involves income taxes. After valuing the tax payments, market discount bonds, which carry income tax liabilities, trade at yields around 25 basis points higher than comparable municipal bonds not subject to any taxes. The high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions.     

Banks’ intraday liquidity management during operational outages: Theory and evidence from the UK payment system

We investigate how settlement banks in the United Kingdom’s large-value payment system deal with intraday liquidity and operational risk. In particular, we are interested in payments behaviour towards a bank that is, for operational reasons, unable to make but able to receive payments. If other banks did not sufficiently monitor their outgoing payments, these operational shocks could impact the entire payment system because the affected bank could absorb liquidity from the system. Our game-theoretic model predicts that only early in the day, when they are uncertain about the payment instructions they might have to execute, banks stop sending payments to a counterparty which is unable to make payments. Using a non-parametric method, we find that this prediction is supported by the data, implying that banks effectively contain the disruption caused by the operational outage: payment flows between healthy banks remain unaffected.     

“营改增”影响地方政府税收努力研究

基于随机前沿分析法（SFA）测算2011-2015年我国地方政府税收努力程度,并运用双重差分法考察“营改增”对地方征税行为的影响。研究发现：“营改增”将地方税（营业税）变为共享税（增值税）,显著降低了地方政府税收努力程度;改革对税收努力的冲击受经济发展水平、转移支付额度和税收返还的影响,获取转移支付收入和税收返还越多的地区税收努力下降速度越快。后“营改增”时期,如何提高税收效率,缓解地方财政收入对转移支付和债务收入的依赖性,是理顺中央和地方财税关系,完善财税收入体系的重要问题。     

ILLIQUIDITY RISK,PROJECT CHARACTERISTICS,AND THE OPTIMAL MATURITY OF CORPORATE DEBT

I derive the optimal maturity period for corporate debt used to finance a specific project, when costly financial distress is triggered by the inability to meet coupon obligations. My model predicts a negative relation between bond risk and maturity, and it explains why high-grade bonds show greater maturity dispersion than low-grade bonds, as observed in U.S. corporate bond markets. The major determinant of bond maturity is project duration for low-risk bonds and project risk for high-risk bonds. Other determinants of bond maturity are debt burden, reorganization costs, corporate tax rate, interest rate, and project growth rate.     

The optimal timing of the transfer of hidden reserves in the German and Austrian tax systems

The lower-of-cost-or-market principle implies that assets may be sold above book value, by which hidden reserves are disclosed. To avoid taxation of these hidden reserves, in German-speaking countries companies are allowed to transfer them to a newly purchased asset within a fixed time period. In this paper, the optimal timing of hidden reserves transfers is developed with special attention to the term structure of interest rates and interest rate risk, and using the replicating principle known from the field of finance. The paper presents one model under certainty and, as a generalization of this model, another model under interest rate risk. In both models, the criterion used for decision-making is the value of the right to transfer, which can be interpreted as the initial cost of a replicating/hedging strategy for tax payments saved/incurred. In the model under certainty, the net present value concept is used to derive the value of the right to transfer. The procedure used in the model under interest rate risk is a combination of flexible planning and the no-arbitrage approach common in derivatives pricing. It is shown that the right to transfer hidden reserves with flexible timing is equivalent to an American-style exchange option. In addition, the impact of term-structure volatility on the value of the right to transfer is analyzed. The technique presented in this paper can also be used to solve other timing problems resulting from trade-offs between early and late tax payments/tax benefits. Copyright © 2002 John Wiley & Sons, Ltd.     

Differential taxation and the equilibrium structure of interest rates

Equilibrium coupon bond pricing relationships given differential taxation are derived under uncertainty assuming that both corporate and municipal bonds were originally issued at par but are currently selling at a discount. The impact of differential taxation upon the term structure and coupon structure of interest rates is investigated, while the tax structure of interest rates is uniquely characterized. Differential taxation substantially alters the prevailing equilibrium structure of interest rates.     

What do firms do when dividend tax rates change? An examination of alternative payout responses

This paper investigates whether investor-level taxes affect corporate payout policy decisions. We predict and find a surge of special dividends in the final months of 2010 and 2012, immediately before individual-level dividend tax rates were expected to increase. We also find evidence that immediately before the expected tax increases, firms altered the timing of their regular dividend payments by shifting what would normally be January regular dividend payments into the preceding December. To our knowledge this is the first evidence in the literature about changes in the timing of regular dividend payments in response to tax law changes. For both actions (specials and shifting), we find that it was more likely for a firm to respond to individual-level tax rates if insiders owned a relatively large amount of the firm. Overall, our paper provides evidence that managers consider individual-level taxes in making corporate payout decisions.     

Target Firm Returns: Does the Form of Payment Affect Abnormal Returns?

Research indicates that at the time of a takeover announcement, target firm shareholders receiving cash earn larger abnormal returns than those receiving stock. Our work confirms that cash targets receive larger direct payments from bidders and that the size of target firm abnormal returns is related to the relative size of this direct payment. Once we control for the size of the payment, however, we find the target firm abnormal returns to be unrelated to the payment method. Thus the relationship between payment method and target firm abnormal returns is indirect. This finding is important because it casts doubt on the signaling (asymmetric information) hypothesis. That is, cash offers do not seem to be valued by the market as a means of reducing this uncertainty. Something else, such as the tax implication differences between cash and stock offers, drives cash target firms to demand larger payments from bidding firms.