1. What is Taxable Equivalent Yield?

The Taxable Equivalent Yield (TEY) is the yield that a taxable bond would need to possess for its yield to equal the yield on a comparable tax-free municipal bond. It helps investors compare returns between taxable and tax-exempt investments.

2. How Does the Calculator Work?

The calculator uses the TEY formula:

Where:

• \( TaxFreeYield \) — Yield of the tax-free investment (as a decimal)
• \( TaxRate \) — Investor's marginal tax rate (as a decimal)

Explanation: The formula adjusts the tax-free yield to show what taxable yield would be needed to provide the same after-tax return.

3. Importance of TEY Calculation

Details: TEY helps investors make informed decisions when choosing between taxable and tax-exempt investments, especially when comparing municipal bonds to corporate bonds or other taxable investments.

4. Using the Calculator

Tips: Enter the tax-free yield percentage (e.g., 3.5 for 3.5%) and your marginal tax rate percentage (e.g., 24 for 24%). The calculator will show the equivalent taxable yield you would need to match the tax-free investment.

5. Frequently Asked Questions (FAQ)

Q1: Why is TEY important for investors?
A: It allows for apples-to-apples comparisons between taxable and tax-exempt investments, helping investors maximize after-tax returns.

Q2: What is a good TEY?
A: A "good" TEY depends on your tax bracket and available investment options. Generally, higher tax brackets benefit more from tax-exempt investments.

Q3: Does TEY account for state taxes?
A: This basic calculator uses federal tax rates. For state-specific calculations, you may need to adjust the tax rate to include both federal and state taxes.

Q4: Are municipal bonds always tax-free?
A: Most are federally tax-free, but some may be subject to state taxes or AMT. Always verify the tax status of specific bonds.

Q5: How does TEY change with different tax brackets?
A: Higher tax brackets result in higher TEY values, making tax-free investments relatively more attractive.