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. It helps investors compare taxable and tax-exempt bonds on an after-tax basis.

2. How Does the Calculator Work?

The calculator uses the Tax Equivalent Yield formula:

Where:

• \( Exempt\ Yield \) — Yield of the tax-exempt investment (as decimal)
• \( Tax\ Rate \) — Investor's marginal tax rate (as decimal)

Explanation: The formula adjusts the tax-exempt yield to show what taxable yield would 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 and your marginal tax rate as decimals (e.g., 5% = 0.05, 25% = 0.25). The tax rate must be between 0 and 0.99.

5. Frequently Asked Questions (FAQ)

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

Q2: What's the difference between TEY and after-tax yield?
A: TEY converts tax-exempt yield to a taxable equivalent, while after-tax yield converts taxable yield to its after-tax value.

Q3: Should I use my marginal or effective tax rate?
A: Use your marginal tax rate (the rate on your next dollar of income) as this reflects the rate you'd pay on additional investment income.

Q4: Does this work for all tax-exempt investments?
A: Primarily for municipal bonds. Some tax-exempt investments may have different tax treatments at state/local levels.

Q5: How does state tax affect TEY?
A: If the bond is exempt from both federal and state taxes, you should use your combined marginal tax rate for most accurate results.