Tax Equivalent Yield Chart
Tax Free Yield  Tax Equivalent Yield per Marginal Tax Ra …  Tax Equivalent Yield per Marginal Tax Ra …  Tax Equivalent Yield per Marginal Tax Ra …  Tax Equivalent Yield per Marginal Tax Ra … 
Tax Free Yield  10% Tax Bracket  15% Tax Bracket  25% Tax Bracket  39.6% Tax Bracket 
2%  2.22%  2.35%  2.66%  3.31% 
2.5%  2.78%  2.94%  3.33%  4.14% 
3%  3.33%  3.53%  4%  4.97% 
Aug 3 2022
. The calculation is a tool that investors can use to compare the returns between a taxfree investment and a taxable alternative.
What is the formula for taxable equivalent yield?
The formula looks like this: Tax Equivalent Yield = Tax Free Yield ÷ (1 – marginal tax rate) For a quick example, lets assume a marginal tax rate of 25% and we want to know the taxable equivalent yield of a municipal bond paying 3%: Tax Equivalent Yield = 0.03 ÷ (1 – 0.25) or 0.03 ÷ 0.75 = 0.04 or 4%. For this example, you’d need a taxable bond with a yield of 4% to get the same return as a municipal bond.
What is my taxable yield equivalent?
The taxequivalent yield is the yield on a taxable bond that an investor would have to earn to match the return on a comparable taxfree municipal bond. Municipal bonds generally have a low expected return, so the full impact of investing in them due to tax savings is often not quantified completely.
What is an equivalent taxable yield?
Equivalent taxable yield is the effective interest rate that must be offered on a taxable bond instrument in order to arrive at the same aftertax yield built into a taxexempt bond instrument. This amount is always higher than the interest rate on a taxexempt bond, because the investor must pay income taxes on the income from the taxable bond.
How to calculate the effective aftertax yield?
How to Calculate the Effective AfterTax Yield
 Find the Investor’s Marginal Tax Rate. The marginal tax rate is the highest percentage of income tax that a person will have to pay. …
 Calculate the Total Tax Rate. The total tax rate can be found by adding the percentages a person or business must pay in applicable taxes.
 Find the Effective Interest Rate After Tax. …
 Apply the AfterTax Return Formula. …
How do you calculate tax free equivalent yield?
Calculating Tax Equivalent YieldFind the reciprocal of your tax rate (1 – your tax rate). If you pay 25% tax, your reciprocal would be (1 – . 25) = . 75, or 75%.Divide this amount into the yield on the taxfree bond to find out the TEY. For example, if the bond in question yields 3%, use (3.0 / . 75) = 4%.
What is the tax equivalent yield formula?
Taxequivalent yield = interest rate ÷ (1 – your tax rate) You would perform the following calculation if you want to know the real rate of return on a nontaxable municipal bond—the rate that would be equivalent on a taxable bond.
What is the yield on tax free municipal bonds?
The corporate bonds yield 7%, and the taxfree municipal bonds yield 5%.
How do you find the equivalent yield?
The bond equivalent yield formula is calculated by dividing the difference between the face value of the bond and the purchase price of the bond, by the price of the bond. That answer is then multiplied by 365 divided by “d,” which represents the number of days left until the bond’s maturity.
What is equivalent yield?
Equivalent Yield (true and nominal) is a weighted average of the Net Initial Yield and Reversionary Yield and represents the return a property will produce based upon the timing of the income received. The true equivalent yield assumes rents are received quarterly in advance.
What is a taxFree bond?
“Taxexempt” means that the interest component of bond debt service payments is exempt from federal and sometimes state and local income taxes for the bond holder. Therefore, with regard to credit quality and term of the bonds, the interest rate will be lower than for a taxable bond.
Are taxfree bonds a good investment now?
The Bottom Line Highlyrated bonds are by their nature very safe investments compared to almost any other alternative and especially compared to stocks. Municipal bonds are, as advertised, free of federal taxes. That doesn’t mean that the overall return on a muni bond will be the best available option for you.
Are taxfree municipal bonds really taxfree?
Although municipal bonds generally aren’t subject to federal taxes, the IRS does include income from such bonds in your modified adjusted gross income (MAGI) when determining how much of your Social Security benefit is taxable.
Are taxexempt municipal bonds a good investment?
Investing in municipal bonds is a good way to preserve capital while generating interest. Most of them are exempt from federal taxes, and some are taxfree at the state and local levels as well. 1 Municipal bonds, also called “munis,” help build infrastructure in your area.
How do you calculate equivalent yield in Excel?
So, a Bond Equivalent Yield Formula is calculated by dividing the difference between Face Value and Purchase price of the bond by the purchase price of a bond and then multiply it by 365 and divide by No. of days to maturity.
What is the purpose of bond equivalent yield?
What is the purpose of bond equivalent yield? The bond equivalent yield is primarily used to calculate the value of the deep discount or zerocoupon bonds on an annualized basis. It also helps investors find the equivalent yield between two or more bonds.
What is the difference between bond equivalent yield and bank discount yield?
BEY is the total yield on bonds after taking into account the total interest applicable, i.e., the simple semiannual interest on an actual daycount basis. Where: DR is the discount rate (which is basically the discount yield expressed in decimal form) t is the number of days left between settlement and maturity.
How do you calculate equivalent yield in Excel?
So, a Bond Equivalent Yield Formula is calculated by dividing the difference between Face Value and Purchase price of the bond by the purchase price of a bond and then multiply it by 365 and divide by No. of days to maturity.
What is the taxable equivalent yield on a municipal bond quizlet?
Explanation: The taxequivalent yield equals the taxexempt yield divided by the difference between 100% and the tax bracket.
What is tax yield?
What Is the TaxEquivalent Yield? The taxequivalent yield is the return that a taxable bond would need to equal the yield on a comparable taxexempt municipal bond. The calculation is a tool that investors can use to compare the returns between a taxfree investment and a taxable alternative.
What would the equivalent taxable yield be on an investment that offers a 6 percent taxexempt yield assume a marginal tax rate of 28%?
32.14%ANSWER: D.
What Is TaxEquivalent Yield and How Is It Calculated?
Generally speaking, comparing two bonds is easy. All else being equal, the bond with the higher interest rate will yield more money over time. But you can’t simply compare interest rates when looking at taxexempt bonds as opposed to the more common taxable bonds because you have to account for taxes or, as is the case of municipal bonds, the lack thereof.
Why do people in higher income brackets want bonds?
Because of these tax breaks, those in higher income brackets might seek these types of bonds in order to avoid paying taxes on the interest that’s generated. Even though those in higher tax brackets will see a greater benefit, anyone looking for a fixed income investment can benefit.
What are the different types of bonds?
There are many types of bonds, from corporate bonds to government bonds like Treasury bonds, and even municipal bonds. These types of investments are different from most stocks as they can be used to generate regular, fixed income as opposed to some increase in value due to capital gains . Although there are several differences between …
Is municipal bond interest taxed?
Unlike other bond types, interest on municipal bonds and some municipal bond funds are exempt from federal income tax. It might be exempt from state income tax as well if you reside in the state or municipality from which the bond was issued. 1
Do municipal bonds pay federal taxes?
Unlike other bond types, interest on municipal bonds and some municipal bond funds are exempt from federal income tax. It might be exempt from state income tax as well if you reside in the state or municipality from which the bond was issued. 1. Because of these tax breaks, those in higher income brackets might seek these types …
Do tax exempt bonds have a lower interest rate?
Although many taxexempt bonds may appear to have a lower interest rate at first glance, you really won’t be able to determine your real rate of return until you calculate the taxequivalent yield. This can help you make a more informed decision when determining how to invest if you’re attempting to target a specific rate …
Can you compare interest rates on tax exempt bonds?
But you can’t simply compare interest rates when looking at taxexempt bonds as opposed to the more common taxable bonds because you have to account for taxes or, as is the case of municipal bonds, the lack thereof. Taxequivalent yield is a way to measure the return on a taxable bond or other investment to make it equal to …
What is tax equivalent yield?
The tax equivalent yield formula is used to compare the yield between a taxfree investment and an investment that is taxed. One of the most common examples of a taxfree investment is municipal bonds. Municipal bonds are generally issued by local governments to finance development in its local community.
Do bonds have equal risk?
It is important to note before proceeding to this tax equivalent yield formula example that it is assumed that both bonds have equal risk. That is to say, that with the exception of the differences in yield, all things are held constant. Differences in risk do not affect the formula itself, but should be considered in any investment decision and not just the yield.
How to calculate corporate bond yield?
To calculate the tax free equivalent yield, multiply the corporate bond yield by the total tax rate. This is the tax free equivalent yield. In other words, this is the return needed from …
Do municipal bonds require taxes?
Investing in municipal bonds means no federal taxes are required. In certain instances, no state and local taxes are required either. To calculate the tax equivalent yield, use the tax free return and divide it by 1 minus the tax rate.
Is a municipal bond tax free?
Municipal Bonds – Generally speaking, municipal bonds make coupon payments that are tax free. However, there are municipal bonds that are not a tax free bond. Roth IRA – Investments inside of a Roth IRA can be used in retirement years without paying taxes on the gains.
Why is a profitable yield higher than the tax rate?
A profitable yield which is higher than the tax rate ensures a reliable stream of regular income through interest payments from municipal bonds. A properly tax equivalent yield adjust inflation and stables the value of the entire portfolio without taking any market risk.
What is the minimum pretax yield?
The minimum pretax yield a particular bond should possess so that it makes equal to the return on taxexempt investment. Taxable equivalent it is vastly used during the calculation of bond yield.
What is the tax rate for Investor B?
Investor B gets a yield of 12.5% per annum with a tax bracket of 20%
What are the financial instruments that can be issued through capital?
There are different financial instruments through which capital can be issued such as corporate bonds and municipal bonds.
Is a higher coupon rate a risky investment?
The higher the risk the more the interest of Bond. Thus it will be foolish to assume that a higher coupon rate Bond would be less risky. Thus taking everything into account such as coupon rate, discount rate, tenure and tax rate the investor has to decide whether the bond is actually suitable for him or not.
Is municipal bond interest taxable?
Unlike corporate bonds, the interest income from municipal bonds is always exempted from taxes. Thus to determine interest income which is exempted from taxes that is income from municipal bonds, and the interest income which is taxable that is income from corporate bonds we have to calculate with the help of tax equivalent yield calculation.
What is tax equivalent yield?
The tax equivalent yield formula is used to compare the yields between a taxfree investment and a taxable investment. All you need is the yield on the bond and your marginal tax rate, since interest earned on bonds is taxed as regular income. You can use the current income tax brackets to find your marginal tax rate. The formula looks like this:
What is tax free bond?
Tax free bonds, like municipal bonds, are one popular choice for high income earners and retirees.
Which is better, municipal or corporate bond?
In fact, the corporate bond is the better choice for each bracket until you reach the 35% marginal tax bracket. At that point the 3% municipal bond has a taxable equivalent yield of 4.62%, slightly higher than the corporate bond.
Does taxable equivalent yield include state tax?
Here’s a cheat sheet of the taxable equivalent yield based on each marginal tax bracket. It’s based on the federal income tax only. It does not include state income tax.
Is tax savings a priority?
The amount of tax savings is small enough that it shouldn’t be a high priority when choosing investments. On the other hand, those sitting in the top marginal tax brackets will see a bigger tax benefit to using taxfree investments. That said, tax advantages alone don’t guarantee an investment advantage.
Are Tax Free Investments For You?
You’ll notice at the lower marginal tax brackets, the difference between a taxfree and taxable yield is small. As your marginal tax bracket rises, you’ll benefit more from taxfree investments.
What is taxable income?
A Taxable income is your annual gross income for federal tax purposes, less adjustments and the federal deductions you claim (standard or itemized).
Why are municipal bonds less taxed?
Due to differences in tax treatment, municipal bonds that provide federally taxexempt interest income typically yield less than taxable bonds. For the same reason, municipal bonds whose interest is exempt from state and local income tax may yield less than municipal bonds whose interest is taxed in a particular jurisdiction.
What is MAGI in tax?
For the purposes of this calculator, your MAGI is assumed to equal your taxable income. 1 Federally taxexempt obligations of the taxpayer’s state of residence and its political subdivisions. In most states, interest on instate municipals is not subject to state or local income tax.
What is out of state municipal interest?
Federally taxexempt obligations of states (and their political subdivisions) other than the taxpayer’s state of residence. In most states, interest on outofstate municipals is subject to state income tax and applicable local income tax.
What is indicated tax treatment of investment income?
The indicated tax treatment of investment income applies to funds and accounts held outside qualified retirement plans and other taxdeferred or taxexempt investment vehicles. The output is general in nature and is not intended to serve as the primary or sole basis for investment or taxplanning decisions.
Is interest on municipal bonds subject to state income tax?
Federally taxexempt obligations of states (and their political subdivisions) other than the taxpayer’s state of residence. In most states, interest on outofstate municipals is subject to state income tax and applicable local income tax. For DC and ND residents, interest on outofstate municipals is not subject to state income tax, the benefit of which is shown. For MI residents, interest on outofstate municipals is not subject to local income tax where applicable, the benefit of which is shown. For IN residents, interest on outofstate municipals acquired before January 1, 2012 is not subject to state income tax, the benefit of which is not shown. For UT residents, interest on municipals of issuers in AK, DC, FL, IN (if acquired before January 1, 2012), NV, ND, SD, TN, TX, WA and WY is not subject to state income tax, the benefit of which is not shown. Interest on private activity bonds may be subject to tax under the federal AMT and the AMT of certain states, the effect of which is not shown. Interest on municipal obligations of issuers in Puerto Rico and U.S. territorial possessions is not subject to state income taxes.
Is interest on private activity bonds subject to federal tax?
Interest on private activity bonds may be subject to tax under the federal AMT and the AMT of certain states, the effect of which is not shown. 2 Federally taxexempt obligations of states (and their political subdivisions) other than the taxpayer’s state of residence.
What does higher yield mean in bonds?
Higher yields typically indicate a riskier asset. Therefore, the riskier the bond, the higher you can expect the yield to be. Highyield bonds that lack an investmentgrade credit rating are known as ” junk bonds .” If you’re seeking the highest possible yield, junk bonds are what you want. However, before you invest, consider the risk of default and how that could impact your investments.
What does it mean when a bond’s yield is less than its coupon rate?
When a bond’s yield is less than its coupon rate, that means interest rates have fallen and bond prices have risen since the bond was first issued.
What Are Municipal Bonds?
Munis are securities issued by state and local governments to raise money. When you buy a bond, you lend money to that entity with the promise that it will pay you back with interest.
What is a tey bond?
The taxequivalent yield (TEY) of a bond is the return that a taxable bond needs in order to be equal to the return on a taxexempt municipal bond. Knowing how to calculate the TEY on municipal bonds is a key element of determining whether they make sense for your investment portfolio over other types of bonds.
How to find the reciprocal of 25% tax?
Find the reciprocal of your tax rate (1 – your tax rate). If you pay 25% tax, your reciprocal would be (1 – .25) = .75, or 75%.
Is a municipal bond tax free?
Municipal bonds issued within your state of residence may be taxfree on both the federal and state levels, referred to as “double taxfree.”. Be sure to factor in your state’s income tax rate when calculating your reciprocal in Step 1 of the taxequivalent calculation. For example, if your federal tax rate is 25%, and your state tax rate is 3%, …
Do you have to do math before buying a municipal bond?
It helps to do this simple math before you buy a municipal bond or muni bond fund. Taxfree income sounds like a great idea on paper, but you may be passing up the chance to earn higher aftertax income with your muni bond investments.
Understanding TaxEquivalent Yield

Tax implications, in general, are a complicated and important part of any financial strategy, as well as an often overlooked part. The taxequivalent yield calculation is a useful tool for investors, especially those in higher tax brackets. The taxequivalent yield is the yield on a taxable bond th…
TaxEquivalent Yield Formula

Depending on an investor’s tax bracket, a municipal bond may not be the best investment decision for their portfolio. An investor’s tax bracket will depend on their filing status and income. The federal income tax brackets for 2020 and 2021 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.1 To calculate the taxable equivalent yield of a taxfree municipal bond, use the following formula …
Example of TaxEquivalent Yield Formula Calculations

An investor’s tax rate plays a significant role in the resulting taxequivalent yields. For example, assume there is a taxfree bond that is yielding 7%. A decision to invest in this particular bond or any of the many taxable choices available greatly depends on the investor’s marginal tax bracket. In the United States, as of 2020, there are seven different marginal taxrate brackets: 10%, 12%, 2…
Example of TaxEquivalent Yield

An investor in the 22% federal income tax bracket, and no state taxes, owns a taxexempt municipal bond with an 8% coupon rate. To calculate the fully taxable equivalent yield that a taxable bond would have to earn to match the municipal bond’s yield, use the above formula. 1. ReturnTEY= 0.08 ÷ (1 – 0.22) = 10.26% In other words, a taxable bond would have to earn an equ…
Special Considerations
 Why Are Municipal Bonds TaxExempt?
Interest earned on state and local bonds has been taxexempt since the introduction of the federal income tax in 1913. Initially, this was because many people felt the Constitution prevented the federal government from taxing this income. Since then, the justification for tax exclusion has b…