Taxable Equivalent Yield
Definition: The yield at which a comparable taxable bond would need to return to earn the same yield as a tax-exempt bond when considering tax consequences on the taxable bond income.
- Yield isn’t a perfect variable for this use but is a good proximation.
- Does not take into account capital gains.
- Consultation with tax specialists is strongly recommended.
Taxable Equivalent Yield: Calculation
Taxable Equivalent Yield (TEY) = Tax exempt yield / (1 – tax rate)
Tax exempt yield = 3%
Federal tax rate = 32%
Taxable Equivalent Yield: 4.4% = 3%/(1-.32)
(At this tax bracket, a corporate bond would need to yield at least 4.4% for the investor to result in an after tax return that equals that of a similar tax exempt bond yielding 3%)
Taxable Equivalent Yield: Tax Bracket Resources
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