Pretax Rate Of Return
Since dividends on stocks may be taxed at a different level from interest income or capital gains, for example, the pretax rate of return enables comparisons to be made across different asset classes. However, it is the after-tax rate return that is most important to investors.
For example, assuming a capital gains tax rate of 15%, a stock that provides a 5% pretax rate of return would have an after-tax rate of return of 4.25%. However, suppose that a municipal bond that is tax-exempt and has a pretax return of 4.25% and would therefore also have the same after-tax rate of return. In this case, an investor may choose the municipal bond because of its greater degree of safety and the fact that its after-tax return is the same as that of the more volatile stock, despite the latter having a higher pretax rate of return.
Investment dictionary. Academic. 2012.
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