The numbers provided previously use federal income tax rates to find the
after-tax yield. Many investors, though, would also pay state and even local income tax on interest from taxable bonds.
[R.sub.FR] is the nominal,
after-tax yield that equates the above relationship.
On a risk-adjusted basis, any comparable-maturity bank-qualified municipal or taxable security will provide a higher
after-tax yield. Banks continue to find that bank-qualified municipal securities offer the highest
after-tax yields.
It is known that a higher (lower) future tax rate [[Tau].sub.t+i], which is dependent upon a higher (lower) future income, leads to a lower (higher) future
after-tax yield, [Mathematical Expression Omitted], which may affect the future consumption in the following two ways.(4)
Table 1 suggests that for those taxpayers at the highest marginal tax rates the
after-tax yield on municipals far exceeded the
after-tax yield on treasuries.
In Hendershott and Koch's certainty model, the insurer invests in tax-exempt bonds whenever the tax-exempt yield exceeds the
after-tax yield from taxable bonds and the underwriting losses are matched by income from taxable bonds.
The latter can easily be shown to equate to an
after-tax yield of 16.9 per cent or approximately 25 per cent pre-tax.
This stream of tax liabilities is discounted at the average
after-tax yield at which coupon-bearing Republic of Austria debt maturing in approximately 5.5 years was trading on January 28, 1991.(11) The single tax liability that would be owing at maturity under the contingent-interest tax treatment is discounted at the
after-tax yield on the outstanding Republic of Austria zero coupon debt issue.
Assuming you are subject to the top federal rate, 31 percent, you would have to find a CD yielding more than 10 percent to give you an equivalent
after-tax yield higher than the state's 6.4 percent munis.
With some municipal bonds and bond funds currently yielding at least as much as taxable funds, you may find your
after-tax yield better with these investments for the remainder of 1992 and also early into 1993.
If use of an after-tax computer-driven valuation model is considered, Boykin's point that required
after-tax yield data are not generally available should be remembered.
A key to the attractiveness of this investment is a high
after-tax yield. This means that the issuer must have an unusually strong credit rating to mitigate the fact that, in context of insolvency, MMPs as equity are junior in position to alternative non-equity investments.