**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 bracketis considering a municipal bond yielding3%. The TEY calculator would show that this is equivalent to a taxable investment yielding approximately3.95%. This means the investor would need to find a taxable investment offering at least3.95%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

**tax bracket.**

*28%*## 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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