Taxable Equivalent Yield Calculator Municipal Bonds

TEY Formula:

\[ TEY = \frac{\text{Municipal Yield}}{(1 - \text{Tax Rate})} \]

Taxable Equivalent Yield (TEY):

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1. What is Taxable Equivalent Yield?

Taxable Equivalent Yield (TEY) is a calculation that allows investors to compare the yield of a tax-free municipal bond to that of a taxable bond. It shows what yield you would need to earn on a taxable investment to equal the tax-free yield of a municipal bond after taxes.

2. How Does the Calculator Work?

The calculator uses the TEY formula:

\[ TEY = \frac{\text{Municipal Yield}}{(1 - \text{Tax Rate})} \]

Where:

Municipal Yield — The tax-free yield percentage of the municipal bond
Tax Rate — Your marginal tax rate expressed as a decimal (e.g., 0.25 for 25%)

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 municipal bonds (which are typically tax-exempt) with taxable bonds. It ensures you're comparing investments on an after-tax basis, which is crucial for accurate investment analysis.

4. Using the Calculator

Tips: Enter the municipal bond yield as a percentage (e.g., 3.5 for 3.5%) and your marginal tax rate as a decimal (e.g., 0.32 for 32%). The tax rate should be between 0 and 0.99.

5. Frequently Asked Questions (FAQ)

Q1: Why is TEY important for bond investors?
A: TEY allows investors to compare tax-free municipal bonds with taxable bonds on an equal footing, helping determine which investment provides better after-tax returns.

Q2: What tax rate should I use in the calculation?
A: Use your marginal federal income tax rate. For more accurate comparisons in states that tax municipal bond income, you may need to adjust for state taxes as well.

Q3: Are all municipal bonds completely tax-free?
A: Most municipal bonds are exempt from federal income tax, but some may be subject to state or local taxes, especially if you live in a different state than where the bond was issued.

Q4: How does TEY change with different tax brackets?
A: Higher tax brackets result in higher TEY values, making municipal bonds more attractive to investors in higher tax brackets.

Q5: Should I only consider TEY when choosing bonds?
A: While TEY is important, also consider credit quality, duration, call features, and other risk factors when making investment decisions.