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Tax-Equivalent Yield (Municipal Bonds) Calculator

Compute tax-equivalent yield for municipal bonds given tax-free yield, marginal tax rate, and taxable equivalent.

Tax-Equivalent Yield (Municipal Bonds) Calculator

Compute tax-equivalent yield for municipal bonds given tax-free yield, marginal tax rate, and taxable equivalent.

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Guide

Comparing municipal bonds to taxable bonds using tax-equivalent yield

  • Tax-equivalent yield = Tax-Free Yield / (1 - Marginal Tax Rate). It shows what a taxable bond must yield to match the after-tax return of a municipal bond.
  • Municipal bonds are typically exempt from federal taxes and sometimes state/local taxes, making them attractive for high-tax-bracket investors.
  • Use your marginal tax rate (the rate on your last dollar of income), not your average tax rate, for accurate comparison.
  • Compare tax-equivalent yield to taxable bond yields of similar credit quality and maturity to determine the better investment.
  • Consider state tax exemption—if the municipal bond is from your state, you may avoid state taxes, further increasing the advantage.

Frequently Asked Questions

Tax-equivalent yield, municipal bonds, and tax-efficient investing

What is tax-equivalent yield?

Tax-equivalent yield is the yield a taxable bond must provide to match the after-tax return of a tax-free municipal bond, accounting for your marginal tax rate.

Why use marginal tax rate instead of average?

Marginal tax rate reflects the tax on your next dollar of income, which is what you'll pay on taxable bond interest. Average tax rate understates the benefit of tax-free bonds.

Are all municipal bonds tax-free?

Most municipal bonds are exempt from federal taxes. State and local tax exemption depends on whether you're a resident of the issuing state. Some private activity bonds may be subject to alternative minimum tax (AMT).

When are municipal bonds most attractive?

Municipal bonds are most attractive for investors in high tax brackets (e.g., 32%+ federal) where the tax-equivalent yield significantly exceeds taxable bond yields.

Should I consider credit risk?

Yes. Compare municipal bonds to taxable bonds of similar credit quality and maturity. Higher credit risk should be compensated with higher yields regardless of tax status.

How does state tax exemption affect the calculation?

If you're a resident of the issuing state, you may also avoid state and local taxes. Add state tax rate to federal rate for a more accurate tax-equivalent yield calculation.

Are municipal bonds suitable for tax-advantaged accounts?

Generally no. Since IRAs and 401(k)s are already tax-deferred or tax-free, the tax exemption of municipal bonds provides no additional benefit. Prefer taxable bonds in these accounts.

What about alternative minimum tax (AMT)?

Some private activity municipal bonds are subject to AMT. Check the bond's AMT status, as it may affect the tax-equivalent yield calculation for AMT-subject investors.

How do I find my marginal tax rate?

Check the current federal income tax brackets. Your marginal rate is the tax rate on your highest bracket of taxable income. State tax rates vary by state.

Should I always choose the highest tax-equivalent yield?

Not necessarily. Consider credit risk, liquidity, call risk, and your investment horizon. Tax-equivalent yield is one factor in bond selection, not the only factor.

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Tax-Equivalent Yield (Municipal Bonds) Calculator

Compute tax-equivalent yield for municipal bonds given tax-free yield, marginal tax rate, and taxable equivalent.

How to use Tax-Equivalent Yield (Municipal Bonds) Calculator

Step-by-step guide to using the Tax-Equivalent Yield (Municipal Bonds) Calculator:

  1. Enter your values. Input the required values in the calculator form
  2. Calculate. The calculator will automatically compute and display your results
  3. Review results. Review the calculated results and any additional information provided

Frequently asked questions

How do I use the Tax-Equivalent Yield (Municipal Bonds) Calculator?

Simply enter your values in the input fields and the calculator will automatically compute the results. The Tax-Equivalent Yield (Municipal Bonds) Calculator is designed to be user-friendly and provide instant calculations.

Is the Tax-Equivalent Yield (Municipal Bonds) Calculator free to use?

Yes, the Tax-Equivalent Yield (Municipal Bonds) Calculator is completely free to use. No registration or payment is required.

Can I use this calculator on mobile devices?

Yes, the Tax-Equivalent Yield (Municipal Bonds) Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.

Are the results from Tax-Equivalent Yield (Municipal Bonds) Calculator accurate?

Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.