Bad Bond Math: An Object Lesson Using Bloomberg’s After-Tax Yields on Market Discount Bonds

Defining information to be a subset of data (information is data that has utility in decision making), the author offers an object lesson to demonstrate the challenge facing an investor using after-tax yield data presented on a widely viewed Bloomberg page. He demonstrates that users of "black...

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Bibliographic Details
Published in:The journal of wealth management 2013-04, Vol.15 (4), p.61-67
Main Author: Smith, Donald J.
Format: Article
Language:English
Subjects:
Capital gains
Comparative analysis
Conventions
Corporate bonds
Income taxes
Interest income
Internal rate of return
Municipal bonds
Ordinary interest
Original issue discount
Studies
Tax rates
Yield
Yield to maturity
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Summary:Defining information to be a subset of data (information is data that has utility in decision making), the author offers an object lesson to demonstrate the challenge facing an investor using after-tax yield data presented on a widely viewed Bloomberg page. He demonstrates that users of "black box" technologies need to be able to confirm the numbers that are presented to them by data suppliers and check those calculations and underlying assumptions on a regular basis. Failure to understand these assumptions can lead investors to erroneous conclusions, as illustrated in the comparison of two categories of bonds, deeply discounted U.S. corporate bonds, distressed tax-exempt U.S. municipal bonds, and the projected after-tax rates of return on all of the securities under consideration (given assumed tax rates on ordinary income and capital gains and, of course, assuming no default). [PUBLICATION ABSTRACT]
ISSN:1534-7524
2374-1368
DOI:10.3905/jwm.2013.15.4.061