Taxable Equivalent Yield Calculator

TEY Formula:

\[ TEY = \frac{\text{tax-free}}{\text{1 - marginal tax}} \]

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 investment (like municipal bonds) to that of 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 TEY formula:

\[ TEY = \frac{\text{tax-free}}{\text{1 - marginal tax}} \]

Where:

\( tax-free \) — Tax-free yield percentage
\( marginal tax \) — Investor's marginal tax rate in decimal form

Explanation: The formula adjusts the tax-free yield to show what equivalent taxable yield would be required to produce 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, ensuring accurate comparisons of potential returns based on individual tax situations.

4. Using The Calculator

Tips: Enter the tax-free yield as a percentage and your marginal tax rate as a decimal (e.g., 0.25 for 25%). Both values must be valid numbers within their respective ranges.

5. Frequently Asked Questions (FAQ)

Q1: Why is TEY important for investment decisions?
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: What is considered a good TEY?
A: A good TEY depends on individual circumstances. Generally, if the TEY is higher than available taxable yields, the tax-free investment may be more attractive.

Q3: How do I find my marginal tax rate?
A: Your marginal tax rate is the tax rate you pay on your highest dollar of income. You can find this information from your tax bracket or consult a tax professional.

Q4: Does TEY account for state taxes?
A: The basic TEY calculation typically uses federal marginal tax rates. For more precise comparisons, state and local taxes should also be considered.

Q5: Are there limitations to TEY calculations?
A: TEY provides a simplified comparison and doesn't account for other factors like investment risk, liquidity, or changes in tax laws that might affect actual returns.