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 the after-tax return of taxable and tax-exempt bonds.

2. How Does the Calculator Work?

The calculator uses the TEY formula:

Where:

• \( \text{Tax-Free Yield} \) — Yield of the tax-exempt bond (as a percentage)
• \( \text{Tax Rate} \) — Investor's marginal tax rate (as a percentage)

Explanation: The formula accounts for the tax savings from holding a tax-exempt bond by showing what yield a taxable bond would need to provide the same after-tax return.

3. Importance of TEY Calculation

Details: Calculating TEY is crucial for making informed investment decisions between taxable and tax-exempt bonds, especially for investors in higher tax brackets.

4. Using the Calculator

Tips: Enter the tax-free yield (e.g., from a municipal bond) 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 calculate taxable equivalent yield?
A: It helps compare taxable and tax-exempt bonds on an equal footing by accounting for tax differences.

Q2: What's a good TEY?
A: A "good" TEY depends on current market conditions and your tax bracket. Generally, higher tax brackets benefit more from tax-exempt bonds.

Q3: Should I always choose the investment with higher TEY?
A: Not necessarily. Also consider credit risk, duration, and other factors when choosing bonds.

Q4: Does this apply to all tax-exempt bonds?
A: Mostly yes, but some municipal bonds may be subject to AMT or state taxes, which would affect the calculation.

Q5: How accurate is this calculation?
A: It's accurate for comparing federal tax implications, but doesn't account for state/local taxes which may also apply.