1. What is Tax Equivalent Yield?

The Tax Equivalent Yield (TEY) is the yield a taxable bond would need to equal the yield on a comparable tax-exempt municipal bond. It helps investors compare taxable and tax-exempt investments.

2. How Does the Calculator Work?

The calculator uses the TEY formula:

Where:

• \( Rate \) — Yield on the tax-exempt investment (decimal)
• \( Marginal\ Tax \) — Investor's marginal tax rate (decimal)

Explanation: The formula adjusts the tax-exempt yield to show what 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 choosing between taxable and tax-exempt investments, especially when comparing municipal bonds to corporate bonds or other taxable investments.

4. Using the Calculator

Tips: Enter the tax-exempt rate and your marginal tax rate as decimals (e.g., 5% = 0.05). All values must be valid (rate > 0, 0 ≤ tax < 1).

5. Frequently Asked Questions (FAQ)

Q1: Why is TEY important for investors?
A: It allows for accurate comparison between taxable and tax-exempt investments by accounting for the investor's tax situation.

Q2: 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. Consult current tax brackets or a tax professional.

Q3: Does TEY account for state taxes?
A: The basic TEY calculation only considers federal taxes. For state taxes, you would need to adjust your marginal tax rate accordingly.

Q4: When should I use TEY?
A: Use TEY when comparing municipal bonds to taxable bonds or other taxable investments to make an apples-to-apples comparison.

Q5: Are there limitations to TEY?
A: TEY doesn't account for differences in risk, liquidity, or other factors between investments - it only compares after-tax yields.