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.

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. 80-10-10 Mortgage

    A mortgage transaction in which a first and second mortgage are simultaneously originated. The first position lien has an 80% loan-to-value ratio, the second position lien has a 10% loan-to-value ratio and the borrower makes a 10% down payment. 80-10-10 mortgage transactions are piggy-back mortgage transactions, and are frequently used by borrowers to avoid paying private mortgage insurance.
  2. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific benchmark, such as a SPDR. Unlike actively managed ETFs, passive ETFs are not managed by a fund manager on a daily basis.
  3. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another market so that it balances out. So when examining a specific market, if all other markets are in equilibrium, Walras' Law asserts that the examined market is also in equilibrium.
  4. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
  5. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
Trading Center