Capital Gains/Losses only come into play if you sell a bond before it matures and don't effect the tax equivalent yield at all.
Because a tax equivalent yield is built off of yield to MATURITY, the underlying assumption is that the municipal bond will be held until maturity. For tax purposes, "extra" income from accretion of a discount bound is treated and taxed as interest income, and the same thing applies for a corporate bond as well.
If I buy a 3% Municipal Bond at 98 and it matures in two years at 100, I am just telling the IRS my interest income is 3 + 1% (total of 4%) annually and I am not reporting any capital gains at all, which is what makes the whole thing work.作者: kmf229 时间: 2011-7-11 18:23
oh, very interesting I didnt know that. thanks so much for your response.
