After-Tax Income

You bought a corporate bond that was fully taxable. You spend a hundred grand on the 7% coupon bond, which pays you $3,500 twice a year, or $7,000 annually. Unfortunately, that $7,000 gets taxed at the ordinary income rate, and because you had a successful plumbing and parts distribution business, you have a few hundred grand a year coming in your retirement.

So that $7,000, on top of the other money you earn, gets taxed at roughly 50%. Your after-tax income is not, in fact, the notional $7,000 in total interest payments you're receiving for renting your cash to that corporate issuer. Instead, you pay your tax and you net $3,500 a year, not $7,000.

Basically, one of the semi-annual bond payments goes directly to the government. The good news: you keep the other half.