This article aims to explain the spread between spot rates on corporate and government bonds, identifying three key elements: (1) compensation for expected default of corporate bonds, (2) compensation for state taxes since holders of corporate bonds pay state taxes while holders of government bonds do not, and (3) compensation for the additional systematic risk in corporate bond returns relative to government bond returns. The authors emphasize the tax effects, which have been overlooked in previous studies, and provide empirical estimates of each component. They argue that corporate bond returns are systematically related to factors affecting stock market risk premiums, suggesting that a risk premium exists in corporate bond spreads. The study also examines the impact of these components on the term structure of corporate spreads and the pricing errors when using estimated spot rates. The results indicate that the spread due to expected default and taxes is insufficient to explain the observed corporate spreads, highlighting the importance of the risk premium.This article aims to explain the spread between spot rates on corporate and government bonds, identifying three key elements: (1) compensation for expected default of corporate bonds, (2) compensation for state taxes since holders of corporate bonds pay state taxes while holders of government bonds do not, and (3) compensation for the additional systematic risk in corporate bond returns relative to government bond returns. The authors emphasize the tax effects, which have been overlooked in previous studies, and provide empirical estimates of each component. They argue that corporate bond returns are systematically related to factors affecting stock market risk premiums, suggesting that a risk premium exists in corporate bond spreads. The study also examines the impact of these components on the term structure of corporate spreads and the pricing errors when using estimated spot rates. The results indicate that the spread due to expected default and taxes is insufficient to explain the observed corporate spreads, highlighting the importance of the risk premium.