Tax Equivalent Yield
Compare the yield of a tax-free municipal bond to a taxable bond on an apples-to-apples basis.
Results
What is it?
Tax Equivalent Yield (TEY) converts the yield of a tax-exempt municipal bond into the yield a taxable bond would need to offer to produce the same after-tax income. The formula is: TEY = Tax-Free Yield ÷ (1 − Marginal Tax Rate).
How to use
Enter the yield of the tax-free bond and your marginal federal tax rate. The calculator shows what a taxable bond would need to yield to match the after-tax return of the muni bond. A higher tax bracket makes munis comparatively more attractive.
Example scenario
A 3.5% municipal bond yield for someone in the 32% tax bracket has a tax-equivalent yield of 5.15%. This means a taxable bond would need to yield at least 5.15% to deliver the same after-tax return.
Pro tip
If your state also exempts in-state muni bond interest, add your state tax rate to get the combined marginal rate for an even higher TEY. High-income earners in the 35-37% brackets benefit most from muni bonds.