a par yield curve is used to construct a spot rate curve to eliminate the effect of tax treatment securities selling at discount or premium?
whats special with the tax treatment of securities selling at premium or discount? capital gains?
yes, there’s different marginal tax rates between interest income (oridinary income) and gains/losses from discounts/premiums (capital gains). This difference in rates causes different after-tax returns amongst bonds with a similar maturity profile and could distort pricing.