Scandinavian Working Papers in Economics
Working Papers,
Copenhagen Business School, Department of Finance
No 1999-13: On Makeham's formula and xed income mathematics
Bjarne Astrup Jensen
Additional contact information
Bjarne Astrup Jensen: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
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.
24 pages, October 15, 1999
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