1. What is Tax Equivalent Yield?

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

2. How Does the Calculator Work?

The calculator uses the TEY formula:

Where:

• \( Muni\ Rate \) — Municipal bond yield (as decimal)
• \( Federal\ Rate \) — Federal tax rate (as decimal)
• \( State\ Rate \) — State tax rate (as decimal, if applicable)

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

3. Importance of TEY Calculation

Details: Comparing taxable and tax-exempt bonds requires accounting for tax differences. TEY helps investors make apples-to-apples comparisons when building portfolios.

4. Using the Calculator

Tips: Enter municipal bond yield and your federal tax rate as percentages. Include state tax rate if applicable. All values must be valid (positive numbers, tax rates less than 100%).

5. Frequently Asked Questions (FAQ)

Q1: Why calculate Tax Equivalent Yield?
A: To fairly compare municipal bonds (tax-free) with corporate/Treasury bonds (taxable) when making investment decisions.

Q2: Should I include state taxes?
A: Yes, if the municipal bond is exempt from both federal and state taxes in your state of residence.

Q3: What if I live in a state with no income tax?
A: You can leave the state tax rate at 0% in the calculator.

Q4: How does AMT affect this calculation?
A: Some municipal bonds may be subject to Alternative Minimum Tax (AMT), which would require a more complex calculation.

Q5: Are municipal bonds always better for high-tax brackets?
A: Generally yes, but other factors like credit risk and duration should also be considered.