Strategy #0000000052 · After-tax relative value
After-tax yield spreads and tax arbitrage
Compare after-tax income under an applicable tax rate; jurisdiction and eligibility change the result.
Tax arbitrage seeks after-tax cash-flow differences across instruments, investors or regimes. US municipal-bond interest may be exempt from federal income tax, but IRS guidance says interest on borrowing to buy or carry tax-exempt securities is not deductible; borrowing cost cannot simply be multiplied by (1−τ). This scenario compares exempt yield with a taxable yield after an entered tax rate and extra costs; it is not tax advice.
Tax treatment varies by jurisdiction and investor; interest on borrowing to buy tax-exempt securities generally is not deductible.
Three ways in
Understand the story. Then inspect the risk.
Start with a familiar situation, check the payoff, then test how the numbers change.
The idea · in two minutes
How much yield spread remains between tax-exempt income and a taxable alternative after costs?
Jack compares a municipal-bond yield with a taxable bond. Rose first checks the bond’s tax status, the investor’s marginal rate and state/local taxes.
The simulator multiplies taxable yield by (1−τ), then compares it with exempt yield and subtracts extra costs. It does not apply a tax deduction to borrowing used to buy tax-exempt income because US IRS rules generally disallow that deduction.
Cross-border credits, holding eligibility, AMT, capital gains and law changes can alter the result. Decisions require rules for the relevant year and professional tax analysis.
- Tax-exempt yield assumptionEnter exempt yield, taxable alternative, assumed tax rate and extra costs to compare a simplified after-tax spread.
- Taxable yield after 30% assumed taxNot a personalised tax calculation; excludes state taxes, AMT, holding period, interest deductions, capital gains and cross-border credits.
- Yield spread after extra costsIllustrative expiry outcome.
Illustrative research examples only. They are not live signals or a recommendation.
The mechanics · payoff and exposure
R_{spread}=y_{exempt}-y_{taxable}(1-\tau)-Costs
yexempt is eligible tax-exempt yield; ytaxable is a taxable alternative and τ is an assumed applicable tax rate. State taxes, AMT, capital gains and leverage are excluded.
Greeks: the directional intuition
- 納稅人身分
- Measures sensitivity to implied volatility.
- 規則細節
- Measures sensitivity to implied volatility.
- 流動性與融資
- Measures sensitivity to implied volatility.
R_{spread}=y_{exempt}-y_{taxable}(1-\tau)-Costs
Practical context · published observations
After-tax yield spreads and tax arbitrage: read the record with its caveats.
The chart uses the published figures or explicitly labelled study inputs below. A historical index or model replay is not the same as an investor’s realised account return.
不是個人化稅務計算；未估州稅、AMT、持有期、借款扣除、資本利得或跨境抵免。 Source ↗ · Methodology ↗
Change assumptions and inspect the scenario
Inputs illustrate the strategy mechanics; they are not live quotes, forecasts or investment advice.
Variants · same family, different risk levers
Related strategies can have different exposures and failure modes.
Compare the mechanism and its limits.
| Related strategy | Relationship | What changes | New cost or risk |
|---|---|---|---|
| Municipal after-tax yield | Tax-exempt interest | Compares exempt yield with taxable equivalent. | Eligibility and state/local law. |
| Cross-border dividend tax wedge | Dividend credits | Compares investor after-tax cash flows across regimes. | Withholding, treaties and anti-avoidance rules. |
| Ex-dividend option transfer | Synthetic ownership | Uses options to alter ex-dividend exposure. | Pricing, execution and tax recharacterisation. |
Not a personalised tax calculation; excludes state taxes, AMT, holding period, interest deductions, capital gains and cross-border credits.
Read beyond the summary
References
Primary sources and research used to describe the strategy and its limits.