corporate equivalent

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Corporate Equivalent

A comparison of yield between taxable bonds selling at par and tax-exempt bonds selling at a discount. A corporate bond yields less than its stated interest rate because of taxation, whereas a tax-exempt municipal bond does not. Thus, a municipal bond paying a lower interest rate will often net the bondholder more than a corporate bond with a slightly higher interest rate, depending upon one's tax bracket. The corporate equivalent yield measures how much this difference is. See also: Municipals-over-bonds spread.

corporate equivalent

The yield that would need to be realized on a taxable bond selling at par in order to achieve the same aftertax yield to maturity of a bond selling at a premium or discount. For example, a $1,000 par, 10% coupon bond that sells for $900 and is due to mature in five years would provide a yield to maturity of 12.8%. However, after taxes have been paid at a rate of 28% on the $100 gain ($1,000 - $900) and 28% on the $100 annual interest payments, the aftertax yield to maturity is slightly under 10%. The corporate equivalent yield is 0.1/(1 - 0.28), or 13.9%.
References in periodicals archive ?
The Minister said that in re-introducing these bills the Government has taken the opportunity to adopt several amendments suggested in the previous detailed committee process which more closely align these reforms with their corporate equivalents.
The ascension from risk manager to CRO also builds on the feeling, expressed by many risk managers, that they are the corporate equivalents of Rodney Dangerfield; they get no respect!

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