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Tax Equivalent Yield Formula:
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Tax Equivalent Yield (TEY) is a calculation that allows investors to compare the yield of a tax-free municipal bond with that of a taxable bond. It shows what yield you would need to earn on a taxable investment to equal the tax-free yield after taxes.
The calculator uses the Tax Equivalent Yield formula:
Where:
Explanation: The formula adjusts the tax-free yield to show what equivalent taxable yield would be needed to produce the same after-tax return.
Details: TEY helps investors make informed decisions when comparing taxable and tax-exempt investments. It's particularly useful for high-income investors in high tax brackets who are considering municipal bonds versus taxable alternatives.
Tips: Enter treasury yield as a decimal (e.g., 0.05 for 5%), and marginal tax rate as a decimal (e.g., 0.35 for 35%). Both values must be valid (yield > 0, tax rate between 0-0.99).
Q1: Why calculate Tax Equivalent Yield?
A: TEY allows for apples-to-apples comparison between tax-free municipal bonds and taxable investments, helping investors choose the most profitable option after taxes.
Q2: What is the marginal tax rate?
A: The marginal tax rate is the percentage of tax applied to your income for each tax bracket in which you qualify. It's the highest tax rate you pay on your income.
Q3: When is TEY most useful?
A: TEY is most valuable for investors in higher tax brackets considering municipal bonds, as the tax advantage becomes more significant with higher marginal rates.
Q4: Are there limitations to TEY calculation?
A: TEY doesn't account for state and local taxes, alternative minimum tax, or changes in tax brackets. It assumes the investor will hold the bond to maturity.
Q5: How do I convert percentages to decimals?
A: Divide the percentage by 100. For example, 5% = 0.05, 25% = 0.25, 35% = 0.35.