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
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.