CHAPTER 4 Bond Taxation

This chapter is about the taxation of bonds in the United States. I’m sure you already appreciate that taxes are very important in financial analysis. After all, the after-tax rate of return is what ultimately matters to an investor and the after-tax cost of funds is what matters to a borrower. But please fight the temptation to think that taxation is boring and just a matter of learning a set of rules. I hope to demonstrate that there are some interesting questions regarding taxation both in theory and in practice, as well as some very useful bond math calculations.

Discussions about taxation commonly involve four aspects of a cash flow, or accrual:

  1. Source. Is the income/expense domestic or foreign?
  2. Timing. Is the ...

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