1. What is Tax Equivalent Yield?

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

2. How Does the Calculator Work?

The calculator uses the Tax Equivalent Yield formula:

Where:

• \( Yield \) — The yield of the tax-exempt investment (as a decimal)
• \( Tax\ Bracket \) — The investor's marginal tax rate (as a 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 considering municipal bonds versus corporate bonds.

4. Using the Calculator

Tips: Enter the tax-exempt yield as a decimal (e.g., 0.05 for 5%) and your marginal tax bracket as a decimal (e.g., 0.24 for 24%). Both values must be valid (yield > 0, tax bracket between 0-0.99).

5. Frequently Asked Questions (FAQ)

Q1: Why is TEY important for bond investors?
A: It allows for direct comparison between taxable and tax-exempt bonds, helping investors choose the option with the best after-tax return.

Q2: How do I find my tax bracket?
A: Your marginal tax bracket can be found in the current IRS tax tables based on your taxable income and filing status.

Q3: Does this account for state taxes?
A: This basic calculator only considers federal taxes. For state-specific calculations, you would need to include state tax rates in your tax bracket.

Q4: When would a tax-exempt bond be better?
A: When the tax-exempt yield is higher than the taxable yield after accounting for your tax bracket (i.e., when TEY > taxable yield).

Q5: Are there other factors to consider?
A: Yes, also consider credit risk, duration, and liquidity when comparing bonds, not just tax-equivalent yield.