1. What Is State Tax Equivalent Yield?

Tax Equivalent Yield (TEY) is a calculation that allows investors to compare the yield of a tax-free investment to a taxable investment. It shows what yield you would need to earn on a taxable investment to match the after-tax return of a tax-free investment.

2. How Does The Calculator Work?

The calculator uses the Tax Equivalent Yield formula:

Where:

• \( yield \) — The tax-free yield percentage
• \( federal \) — Federal tax rate as a decimal
• \( state \) — State tax rate as a decimal

Explanation: This formula adjusts the tax-free yield to show what equivalent taxable yield would be needed to produce the same after-tax return.

3. Importance Of TEY Calculation

Details: Calculating TEY helps investors make informed decisions when comparing taxable and tax-free investment options, particularly municipal bonds versus taxable bonds or other investments.

4. Using The Calculator

Tips: Enter the tax-free yield as a percentage, and both federal and state tax rates as decimals (e.g., 0.25 for 25%). Ensure the sum of tax rates is less than 1 (100%).

5. Frequently Asked Questions (FAQ)

Q1: Why is TEY important for investors?
A: TEY helps investors compare tax-free and taxable investments on an equal basis, ensuring accurate investment decisions based on after-tax returns.

Q2: What types of investments typically use TEY calculations?
A: TEY is most commonly used when comparing municipal bonds (tax-free) to corporate or government bonds (taxable).

Q3: How do I convert percentage tax rates to decimals?
A: Divide the percentage by 100 (e.g., 28% becomes 0.28, 5.5% becomes 0.055).

Q4: Are there any limitations to the TEY calculation?
A: TEY assumes all income would be taxed at the same rate and doesn't account for alternative minimum tax or other tax complexities.

Q5: Should I always choose the investment with the higher TEY?
A: Not necessarily. TEY is one factor to consider alongside credit risk, liquidity, and investment objectives.