Our tax equivalent yield (TEY) calculator helps investors compare the yields of taxable and tax-exempt investments on an equal footing.
The TEY calculator takes into account an investor’s tax bracket and the yield of a tax-exempt investment to determine what yield a taxable investment would need to offer to match the after-tax return of the tax-exempt option.
Suppose an investor in the 24% tax bracket is considering a municipal bond yielding 3%. The TEY calculator would show that this is equivalent to a taxable investment yielding approximately 3.95%. This means the investor would need to find a taxable investment offering at least 3.95% to match the after-tax return of the municipal bond.
Tax Equivalent Yield Calculator
| Tax-Exempt Yield | Tax Bracket | Tax Equivalent Yield |
|---|---|---|
| 2.0% | 10% | 2.22% |
| 2.0% | 12% | 2.27% |
| 2.0% | 22% | 2.56% |
| 2.5% | 10% | 2.78% |
| 2.5% | 12% | 2.84% |
| 2.5% | 22% | 3.21% |
| 3.0% | 10% | 3.33% |
| 3.0% | 12% | 3.41% |
| 3.0% | 24% | 3.95% |
| 3.5% | 10% | 3.89% |
| 3.5% | 22% | 4.49% |
| 3.5% | 32% | 5.15% |
| 4.0% | 10% | 4.44% |
| 4.0% | 24% | 6.15% |
| 4.0% | 35% | 6.15% |
| 4.5% | 22% | 5.79% |
| 4.5% | 32% | 6.61% |
| 4.5% | 37% | 7.14% |
| 5.0% | 10% | 5.56% |
| 5.0% | 24% | 6.58% |
| 5.0% | 35% | 7.69% |
| 5.5% | 24% | 7.24% |
| 6.0% | 35% | 9.23% |
Tax Equivalent Yield Formula
The formula for calculating Tax Equivalent Yield is:
TEY = Tax-Exempt Yield / (1 - Tax Rate)Where:
- TEY is the Tax Equivalent Yield
- Tax-Exempt Yield is the yield of the tax-free investment
- Tax Rate is the investor’s marginal tax rate
For a tax-exempt yield of 4% and a tax rate of 30%:
TEY = 4% / (1 - 0.30)
TEY = 4% / 0.70
TEY = 5.71%This means a taxable investment would need to yield 5.71% to match the after-tax return of the 4% tax-exempt investment for an investor in the 30% tax bracket.
How do you calculate tax-equivalent yield?
To calculate the tax-equivalent yield, follow these steps:
- Compute the yield of the tax-exempt investment
- Identify your marginal tax rate
- Apply the TEY formula: Tax-Exempt Yield / (1 – Tax Rate)
Let’s say you’re considering a municipal bond yielding 3.5%, and you’re in the 35% tax bracket:
TEY = 3.5% / (1 - 0.35)
TEY = 3.5% / 0.65
TEY = 5.38%This calculation shows that for you, the 3.5% tax-exempt yield is equivalent to a 5.38% yield on a taxable investment.
What is the taxable equivalent yield for an investor?
The taxable equivalent yield represents the pre-tax yield that a taxable investment must offer to equal the after-tax yield of a tax-exempt investment.
An investor in the 22% tax bracket evaluating a tax-exempt bond yielding 2.8%:
TEY = 2.8% / (1 - 0.22)
TEY = 2.8% / 0.78
TEY = 3.59%For this investor, the taxable equivalent yield is 3.59%. Any taxable investment offering less than this yield would be less attractive from an after-tax perspective.
What would be your equivalent taxable yield if you are in a 35% tax bracket and can earn 6% on a municipal bond?
The equivalent taxable yield would be 9.23%. This means that for an investor in the 35% tax bracket, a 6% yield on a municipal bond is as valuable as a 9.23% yield on a taxable investment.
Let’s apply the TEY formula to this specific scenario:
TEY = 6% / (1 - 0.35)
TEY = 6% / 0.65
TEY = 9.23%What is the tax-equivalent yield of a treasury bill vs CD?
To compare a treasury bill with a CD (Certificate of Deposit), we need to consider their tax treatments:
- Treasury bills are exempt from state and local taxes but subject to federal taxes.
- CDs are typically fully taxable at federal, state, and local levels.
Scenario:
- Treasury bill yield: 2.5%
- CD yield: 3%
- Federal tax rate: 24%
- State tax rate: 5%
For the treasury bill:
TEY = 2.5% / (1 - 0.24) = 3.29%For the CD:
TEY = 3% / (1 - (0.24 + 0.05)) = 3% / 0.71 = 4.23%The CD offers a higher tax-equivalent yield, despite its lower nominal yield, due to the treasury bill’s partial tax exemption.
How to calculate tax equivalent yield for tax exempt bonds?
Taxable Yield = Tax-Exempt Yield / (1 - Tax Rate)Let’s say you have a tax-exempt bond yielding 3.2%, and you’re in the 28% tax bracket:
Taxable Yield = 3.2% / (1 - 0.28)
Taxable Yield = 3.2% / 0.72
Taxable Yield = 4.44%This means a taxable investment would need to yield 4.44% to match the after-tax return of the 3.2% tax-exempt bond for an investor in the 28% tax bracket.
Sources / References
- Investor.gov – U.S. Securities and Exchange Commission: Tax-Equivalent Yield
- FINRA – Financial Industry Regulatory Authority: Municipal Bonds
- TreasuryDirect – U.S. Department of the Treasury: Treasury Bills
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