taxes and corporate bond yields

Financial Planning - Financial planning in general. (Moderated) 

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Subject Author Date taxes and corporate bond yields Beliavsky 09-04-2007
Posted by Beliavsky on September 4, 2007, 3:06 pm According to the paper below, a significant fraction, often about half, of the excess yield of corporate bonds over Treasury bonds in the U.S. is due to personal income taxes. If this is true, this suggests overweighting corporate bonds over Treasury bonds in tax- deferred 401(k) and IRA accounts by choosing corporate bond funds over treasury bond funds. If yield spreads were entirely explained by corporate default risk, corporate bonds would be less attractive. Swensen of Yale has advised against any investment in corporate bonds, but I think that is dogmatic. Journal of Financial Economics Volume 85, Issue 3, September 2007, Pages 599-636 How much of the corporate bond spread is due to personal taxes? Abstract Existing term structure models of defaultable bonds have often underestimated corporate bond spreads. A potential problem is that investors' taxes are ignored in these models. We propose a pricing model that accounts for stochastic default probability and differential tax treatments for discount and premium bonds. By estimating parameters directly from bond data, we obtain significantly positive estimates for the income tax rate of a marginal corporate bond investor after 1986. This contrasts sharply with the previous finding that the implied tax rates for Treasury bonds are close to zero. Results show that taxes explain a substantial portion of corporate bond spreads. Keywords: Default intensity; Risk-neutral valuation; Amortization; Tax spreads JEL classification codes: G0; G12 Similar Threads Posted Swensen on corporate paper January 18, 2007, 1:57 pm corporate bonds are the new stocks November 14, 2008, 1:20 pm pls,suggest me for corporate valuation method November 27, 2008, 6:20 am US Treasury yields continuing to climb June 13, 2007, 11:56 am high yields on municipal money market funds September 25, 2008, 1:45 pm muni bond fund vs. "core" bond funds March 26, 2007, 10:46 am cd's & taxes October 17, 2006, 12:33 pm IRA penalty and taxes January 4, 2007, 4:59 am Taxes in Retirement...1%? April 17, 2007, 6:07 pm EAFE and foreign taxes April 11, 2007, 2:39 pm