Tax Equivalent Yield Calculator: Compare Taxable and Tax-Free Investments
Compare a tax-free bond’s yield with a taxable one in seconds. Enter the bond’s yield, your marginal tax rate, press “Calculate”, and the Tax-Equivalent Yield (TEY) appears. TEY = Yield ÷ (1 – Tax Rate). For example, a 3.10 % muni bond equals a 3.78 % taxable bond at an 18 % bracket. The U.S. top federal rate is 37 % (IRS, 2023).
Tax Equivalent Yield Calculator
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How to use the tool
Type your tax-free yield (%)
e.g., 3.10 or 5.80. The field accepts 0–100.
Enter your marginal tax rate (%)
e.g., 18 or 40. Use your highest federal bracket.
Press “Calculate” to view the Tax-Equivalent Yield instantly.
Compare the TEY with quoted yields on taxable bonds to decide which pays more after taxes.
Formula widely cited by bond analysts (Investopedia, 2024).
Top U.S. federal bracket: 37 % (IRS, 2023).
Average AA municipal bond yielded 3.45 % in Jan 2024 (Bloomberg Muni Index, 2024).
“Interest on most municipal bonds is exempt from federal income tax” (SEC Investor Bulletin, 2023).
FAQ
What is Tax-Equivalent Yield?
Tax-Equivalent Yield is the pretax yield a taxable bond must pay to equal a tax-free bond’s after-tax return (Investopedia, 2024).
Why does my marginal tax rate matter?
Your marginal rate determines how much of a taxable bond’s interest you keep; higher brackets raise TEY (IRS, 2023).
Does the calculator include state taxes?
No. Add state and local rates to the tax input for a comprehensive TEY (SEC, 2023).
When should I recalculate TEY?
Recalculate after income changes, tax law updates, or when comparing new bonds (FINRA Bond Guide, 2023).
Is a higher TEY always better?
Higher TEY shows greater taxable-bond compensation, but also weigh credit risk and liquidity (MSRB, 2022).
How accurate is the formula?
It uses simple arithmetic; accuracy depends solely on correct inputs (Investopedia, 2024).
Can TEY turn negative?
No. A valid tax rate is 0–100 %; the denominator never reaches zero.
What if my tax rate is 0 %?
TEY equals the tax-free yield because no tax erodes taxable interest.
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