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Department of Finance, Copenhagen Business School Working Paper Series, Department of Finance, Copenhagen Business School

No 1999-13:
On Makeham's formula and xed income mathematics

Bjarne Astrup Jensen

Abstract: The return on a bond investment comes from three sources: Interest payments, real-

ized capital gains and accrued capital gains. We provide an exact description on how

the capital gains can be measured under a variety of accounting rules for measuring

accruals and study the theoretical properties of such rules, their taxation consequences

and the relation between the yield before tax and the yield after tax. The vehicle of

our exposition is Makeham's formula, an actuarial formula for the present value of a

payment stream largely neglected in the nance literature.

Keywords: Makeham's formula; consistent accounting schemes; accrued capital gains; yield be- fore tax and yield after tax.; (follow links to similar papers)

JEL-Codes: C63; G21; (follow links to similar papers)

24 pages, October 15, 1999

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