1. What is Tax Equivalent Yield?

The Tax Equivalent Yield (TEY) is the yield a taxable bond would need to equal the yield on a comparable tax-exempt municipal bond. It helps investors compare the after-tax returns of taxable and tax-exempt investments.

2. How Does the Calculator Work?

The calculator uses the Tax Equivalent Yield formula:

Where:

• \( Municipal\ Yield \) — Yield of the tax-exempt municipal bond (%)
• \( Marginal\ Rate \) — Investor's marginal tax rate (%)

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

3. Importance of TEY Calculation

Details: TEY helps investors make informed decisions between taxable and tax-exempt investments, especially when considering municipal bonds versus corporate or Treasury bonds.

4. Using the Calculator

Tips: Enter the municipal bond yield and your marginal tax rate as percentages. Both values must be valid (yield > 0, tax rate between 0-99.99%).

5. Frequently Asked Questions (FAQ)

Q1: Why is TEY important for bond investors?
A: It allows apples-to-apples comparison between taxable and tax-exempt bonds by accounting for the tax advantages of municipal bonds.

Q2: What's the difference between TEY and after-tax yield?
A: TEY shows the taxable equivalent, while after-tax yield shows what you actually keep after taxes on a taxable investment.

Q3: How do I know my marginal tax rate?
A: It's the tax rate applied to your highest dollar of income. Check IRS tax brackets or consult a tax professional.

Q4: Does TEY account for state taxes?
A: This calculator uses federal rates only. For state-specific calculations, you'd need to adjust for your state tax situation.

Q5: Are all municipal bonds tax-exempt?
A: Most are federally tax-exempt, but some may be subject to AMT or state taxes. Always verify the tax status of specific bonds.