1. What is Taxable Equivalent Yield?

Taxable 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 equal the after-tax return of a tax-free investment.

2. How Does the Calculator Work?

The calculator uses the TEY formula:

Where:

• \( r \) — Yield of tax-free investment (decimal)
• \( t \) — Investor's marginal tax rate (decimal)

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

3. Importance of TEY Calculation

Details: 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 decimal (e.g., 0.05 for 5%) and your marginal tax rate as a decimal (e.g., 0.25 for 25%). Both values must be valid (yield ≥ 0, tax rate between 0-0.99).

5. Frequently Asked Questions (FAQ)

Q1: Why is TEY important for investors?
A: TEY allows investors to compare tax-free and taxable investments on an equal basis, helping them choose the option that provides the best after-tax return.

Q2: How do I convert percentage to decimal?
A: Divide the percentage by 100. For example, 5% becomes 0.05, and 25% becomes 0.25.

Q3: What is marginal tax rate?
A: The marginal tax rate is the tax rate applied to your last dollar of income. It's typically the highest tax bracket you fall into.

Q4: Are municipal bonds always tax-free?
A: While most municipal bonds are federally tax-free, some may be subject to state or local taxes, or alternative minimum tax (AMT).

Q5: When should I use TEY calculations?
A: Use TEY when comparing municipal bonds to taxable bonds, CDs, or other taxable investments to determine which provides the better after-tax return.