1. What is Tax Effective Yield?

Tax Effective Yield (TEY) calculates the equivalent taxable yield for municipal bonds, which are typically tax-exempt. This allows investors to compare municipal bond returns with taxable bond investments on an equal basis.

2. How Does the Calculator Work?

The calculator uses the Tax Effective Yield formula:

Where:

• \( TEY \) — Tax Effective Yield (decimal)
• \( Yield \) — Municipal bond yield (decimal)
• \( Tax\ Rate \) — Marginal tax rate (decimal)

Explanation: The formula adjusts the tax-free municipal bond yield to show what equivalent taxable yield would be needed to provide the same after-tax return.

3. Importance of TEY Calculation

Details: TEY is crucial for investment decision-making, helping investors determine whether tax-free municipal bonds or taxable bonds offer better after-tax returns based on their individual tax situation.

4. Using the Calculator

Tips: Enter municipal bond yield and marginal tax rate as decimals (e.g., 0.05 for 5%). Ensure tax rate is between 0 and 0.99 (0% to 99%).

5. Frequently Asked Questions (FAQ)

Q1: Why calculate Tax Effective Yield?
A: TEY allows apples-to-apples comparison between tax-free municipal bonds and taxable investments, helping investors make informed decisions based on their tax bracket.

Q2: What is a good TEY?
A: A good TEY depends on your tax bracket and available taxable alternatives. Generally, if TEY is higher than comparable taxable bond yields, municipal bonds may be preferable.

Q3: How do I convert percentages to decimals?
A: Divide the percentage by 100 (e.g., 5% = 0.05, 25% = 0.25, 37% = 0.37).

Q4: Does this work for all municipal bonds?
A: Yes, but note that some municipal bonds may be subject to alternative minimum tax (AMT) or state taxes, which should be considered separately.

Q5: Should I always choose the investment with higher TEY?
A: Not necessarily. Consider other factors like credit risk, duration, liquidity, and your overall investment objectives before making decisions.