After-Tax Basis

DEFINITION of 'After-Tax Basis'

A comparison of the net yields produced by taxable and tax-exempt bonds. After-tax basis is most often used when comparing between bonds used to finance private business endeavors (corporate bonds) and bonds used to finance public projects (tax-free municipal bonds). Because one must pay taxes on income derived from corporate bonds, the yield on those bonds is necessarily less than the stated interest rate, whereas tax-exempt municipal bonds can be evaluated at face value.

BREAKING DOWN 'After-Tax Basis'

While the after-tax basis evaluation of taxable and tax-exempt bonds would seem to be very straightforward, it's important to remember that the amount of tax one pays can be a function of one's income, as well as the performance of his/her other holdings.

For example, an investor in a 35% tax bracket receives what amounts to 6.5% interest on a corporate bond with a 10% yield, whereas an investor in a 15% tax bracket, receives 8.5%. Similarly, an investor with market losses to totally or partially offset his/her market gains, will likewise realize more of the listed yield on a corporate bond than an investor with no such losses.

RELATED TERMS
  1. Tax-Exempt Sector

    The market niche comprised of investment vehicles exempt from ...
  2. Double Exempt

    The status accorded to municipal bonds for which interest is ...
  3. Taxable Municipal Bond

    A fixed-income security issued by a local government such as ...
  4. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  5. Dollar Price

    The percentage of par, or face value, at which a bond is quoted. ...
  6. Tax-Exempt Security

    A security in which the income produced is free from federal, ...
Related Articles
  1. Personal Finance

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  2. Managing Wealth

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  3. Personal Finance

    Taxation Rules For Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  4. Markets

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  5. ETFs & Mutual Funds

    Why Muni Bonds and Bond Funds are Perfect Together

    Municipal bonds and bond funds differ in several ways, which is partly why they complement each other well.
  6. Retirement

    How to Pick the Right Bonds For Your IRA

    Learn about the best types of bonds to include in an IRA depending on an investor's risk tolerance. Understand the tax benefits of holding bonds in an IRA.
  7. Managing Wealth

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
  8. Managing Wealth

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  9. Trading

    Finding The Best Yields

    Using yields to supplement earnings can mean big bucks, with the right strategy.
  10. Investing

    Municipal Bonds Offer Something More for Everyone

    Are municipal bonds really for me? The popular perception is that tax-exempt income only benefits those investors in the highest tax brackets.
RELATED FAQS
  1. How are municipal bonds taxed?

    Discover information about trading municipal bonds, specifically the various tax implications municipal bonds have at state ... Read Answer >>
  2. What do cities do with the funds generated from municipal bonds?

    Learn more about municipal bonds, including the various types of bonds issued and the purposes of municipal bond funds, such ... Read Answer >>
  3. How do the returns on municipal bonds compare to those of other bonds?

    Learn how tax-free municipal bonds may provide better returns than other types of bonds, and understand the risks of municipal ... Read Answer >>
  4. What forms of debt security are available for the average investor?

    Discover the various different types of debt securities, issued by government entities or corporations, that are available ... Read Answer >>
  5. Why are simple-interest loans preferred by payday loan companies and pawn shops?

    Learn how you can invest in the corporate bond market without investing a large amount of capital through bond funds and ... Read Answer >>
  6. Who or what is backing municipal bonds?

    Learn about the basics of municipal bonds, including the various revenue sources that are utilized to back or secure municipal ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center