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After‐Tax Bond Yields When Tax and Coupon Payments Are Not Simultaneous
Author(s) -
Becker Michael W.
Publication year - 1995
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1995.tb00855.x
Subject(s) - coupon , economics , bond , payment , bond valuation , monetary economics , valuation (finance) , yield (engineering) , zero coupon bond , tax credit , econometrics , finance , public economics , materials science , metallurgy
Typical after‐tax bond yield‐to‐maturity calculations do not accurately reflect the timing of tax payments for the cash basis tax payer. The best of the methods gives reasonable yield estimates when the first coupon payment date is around May 15. As payment dates vary from May 15, bond values are affected by tax deferrals relating solely to the non‐simultaneity of coupon interest and tax payments. These valuation effects, which are not measured by conventional bond models, can be significant, as demonstrated by model simulation and empirical tests which show that the bond market does price the coupon timing tax deferrals predicted by the model.