1. What is Tax Equivalent Yield?

Tax Equivalent Yield (TEY) is the yield a taxable bond needs to possess for its yield to equal that of a tax-exempt bond. It allows investors to compare taxable and tax-exempt investments on an equal basis.

2. How Does the Calculator Work?

The calculator uses the Tax Equivalent Yield formula:

Where:

• \( TEY \) — Tax Equivalent Yield (decimal)
• \( Treasury\ Yield \) — Yield on the taxable Treasury security (decimal)
• \( Tax\ Rate \) — Investor's marginal tax rate (decimal)

Explanation: The equation adjusts the taxable yield to show what you'd need to earn on a taxable investment to match the after-tax return of a tax-exempt investment.

3. Importance of TEY Calculation

Details: TEY helps investors make informed decisions when comparing taxable bonds (like Treasuries) with tax-exempt bonds (like municipal bonds). It accounts for the impact of taxes on investment returns.

4. Using the Calculator

Tips: Enter the Treasury 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 use Tax Equivalent Yield?
A: It allows for fair comparison between taxable and tax-exempt investments by accounting for your tax situation.

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

Q3: Should I use my marginal or effective tax rate?
A: Use your marginal tax rate (the rate on your next dollar of income) as it reflects the tax impact of additional investment income.

Q4: Does this account for state taxes?
A: The basic formula only accounts for federal taxes. For state tax comparisons, you'd need a more complex calculation.

Q5: When is TEY most useful?
A: Particularly valuable for high-income investors comparing municipal bonds to taxable bonds, or when deciding between taxable and tax-advantaged accounts.