Taxable Equivalent Yield (TEY) Calculator

Taxable Equivalent Yield (TEY)

The Taxable Equivalent Yield (TEY) is a powerful concept in investment and financial planning. It allows investors to compare the yield on a tax-free bond (such as municipal bonds) with that of a taxable bond (like corporate or government bonds). Since interest earned on tax-exempt bonds is not subject to federal or state taxes, the TEY helps you understand the true comparable return of a tax-free investment if it were taxed at your marginal tax rate.

In simple terms, TEY shows what a taxable bond would need to yield to match the after-tax return of a tax-exempt bond. This makes it an essential tool for high-income investors, financial advisors, and portfolio managers looking to maximize returns while minimizing tax liabilities.

Formula for Taxable Equivalent Yield

The formula for TEY is:

Where:
Bond Yield (%): The interest rate (yield) earned on the tax-exempt bond
Marginal Tax Rate (%): The investor’s personal tax rate based on income level

This formula helps bridge the gap between taxable and tax-free investments, allowing for a fair and accurate comparison.

Examples of TEY Calculations

Here are three practical examples to show how TEY works in real-world scenarios:

Example 1

Bond Yield: 4% (tax-free municipal bond)

Marginal Tax Rate: 35%

✅ Interpretation: A tax-free bond with 4% yield is equivalent to a taxable bond with 6.15% yield for someone in the 35% tax bracket.

Example 2

Bond Yield: 5%

Marginal Tax Rate: 25%

✅ Interpretation: A $10,000 investment in a 5% tax-free bond generates the same return as a 6.67% taxable bond, saving the investor money in taxes.

Example 3

Bond Yield: 3.5%

Marginal Tax Rate: 40%

✅ Interpretation: An investor in the 40% tax bracket would need to find a taxable bond yielding 5.83% to equal the returns from a 3.5% municipal bond.

These examples show how higher tax rates significantly increase the attractiveness of tax-free bonds, especially for high-income investors.

Features of Our Taxable Equivalent Yield (TEY) Calculator

Who Should Use This Calculator?

Why Use an Online TEY Calculator?

Manual TEY calculations can be tedious and prone to mistakes, especially when comparing multiple bonds with different yields and tax brackets. Using an online calculator saves time and ensures accuracy by:

Practical Applications of TEY