




The equivalent taxable yield is used by investors to compare the yield of a taxable bond (i.e. government bond or corporate bond) with that of a taxfree bond (i.e. municipal bond). When computing the equivalent taxable yield, an investor wants to determine the minimum yield required in order to receive the same return with both instruments. The equivalent taxable yield takes into account local, state, and federal taxes that must be paid. The formula to calculate the equivalent taxable yield is:
Equivalent Taxable Yield = TaxFree Bond Yield / (1  Investor's Tax Rate)
In the calculation of the equivalent taxable yield, the investor's income tax rate is the sum of the marginal federal tax rate and effective state tax rate (i.e. state and local if applicable). Based on the above formula, it is evident that the equivalent taxable yield increases with the investor's marginal tax rate. Therefore, an investor in a higher tax bracket will calculate a higher equivalent taxable yield making taxfree bonds more valuable. Likewise, an investor living in a state with higher state/local taxes will compute a higher equivalent taxable yield and may too find taxfree bonds more valuable. Below is an equivalent taxable yield calculation example:
TaxFree Bond Rate: 5%
Federal Marginal Bracket: 28%
Effective State Tax Rate: 9.3%
Local Tax Rate: 0%
Equivalent Taxable Yield = 5% /[1(28%+(9.3%*(128%))]
Equivalent Taxable Yield = 7.66%
Based on this equivalent taxable yield and assuming similar credit risk, a taxable bond would need to yield more than 7.66% or more to provide a better return than a taxfree bond yielding 5%. The equivalent taxable yield is also called the taxable equivalent yield (i.e. TEY).
Rate this Equivalent Taxable Yield definition...




Where is the market headed? The answer may surprise you. Find out with the exclusive & Barron's recommended charts of Chart of the Day. 

Popular Terms: reverse mortgage, diluted share, stock market close, VIX, option premium, 401a, per diem, labor relations, deferred tax, inflation, current ratio, EBITDA, limit order, APR, retained earnings, balance sheet, whollyowned subsidiary, phantom income, 1031 exchange, average price per share, class C shares, LIBOR, deferred revenue, in escrow, command economy, quality assurance, real GDP, covered put, Zero Cost Collar, minority interest, open position, Key Rate Duration, margin rate, exdividend, cancelled check, FICO score, stock split, liquidity ratio, 1035 exchange, dividends payable, 144a, annual return, FTSE, debt service coverage, implied volatility, risk management, irrevocable trust, required rate of return, exdividend date


 