Moneyzine
Contents
/Investment Guides /Taxable Equivalent Yield

Taxable Equivalent Yield

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
November 6th, 2024
Advertiser Disclosure

Definition

The term taxable equivalent yield refers to a calculation that converts the yield on a tax-exempt investment to that of a taxable investment. Taxable equivalent yield is frequently used when investing in municipal bonds.

Calculation

Taxable Equivalent Yield (%) = Return on Tax-Exempt Investment / (1 - Tax Rate)

Where:

  • Tax Rate is the investor's marginal income tax rate, which can include factors for both state and federal income taxes.

Explanation

Also known as the taxable equivalent rate, the taxable equivalent yield provides investors with a measure they can use to compare the yields on taxable and tax-exempt bonds. Since the calculation is sensitive to the investor's marginal income tax rate, two investors faced with the same choice between a taxable and tax-exempt bond can come to different conclusions as to which provides a higher after-tax return.

Since the income derived from most corporate bonds is subject to federal income tax (and oftentimes state income taxes too), the only way an investor can make a fair yield comparison to a municipal bond is to adjust the yield for income taxes. Calculating the taxable equivalent yield provides for that direct comparison.

Example

Two investors are faced with a decision between a municipal bond paying 4.00% and a corporate bond paying 5.75%. Investor A is in the 24% tax bracket, while Investor B is in the 37% tax bracket. The taxable equivalent yield for each investor is shown below:

For Investor A= 4.00 / (1 - 0.24), or 5.26%

For Investor B= 4.00 / (1 - 0.37), or 6.35%

So, while the corporate bond paying 5.75% would provide Investor A with a higher return than the municipal bond with a taxable equivalent yield of 5.26%, Investor B would realize higher returns by purchasing the municipal bond with a taxable equivalent yield of 6.35%.

Related Terms

intrinsic value, extrinsic value, current yield, coupon, yield to maturity

Explore Investing Further

  • Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
  • Looking for a way to avoid swap fees while trading forex?
  • By providing instant diversification for your portfolio, investing in ETFs can amplify the potential of any investor, novice or seasoned alike. We scoped the market to curate a list of the best ETF trading platforms available for US investors.
  • Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
  • Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
  • The table below lists the best stock picks under $2, listed on public exchanges.
  • The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
  • This section will highlight the best EV-trading penny stocks available in the United States.
  • The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
  • Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
  • Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.

Related Content

  • Biden Or Trump: Who Is Better For The Economy And Stocks?
    Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
    March 19th, 2024
  • When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
    March 14th, 2024
  • How To Invest in Real Estate Without Becoming a Landlord
    We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
    November 15th, 2024
  • Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
    ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
    February 29th, 2024
  • How to Invest $100 and Grow it to 6 Figures
    Turning $100 into six figures is a goal no one should realistically have. But it's the question you might ask yourself: Can it be done? Sure. Probable? It's less probable than winning the lottery, but technically still probable - like finding a needle in a haystack the size of Canada. But possible? Absolutely.
    October 29th, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.