Tax-Equivalent Income

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Tax-Equivalent Income

The income one derives from a taxable investment that equals the yield of a tax-free investment with less income. A corporate bond yields less than its stated interest rate because of taxation, whereas a tax-exempt municipal bond does not. Thus, a municipal bond that pays a lower interest rate will often net the bondholder more than a corporate bond with a slightly higher interest rate, depending upon one's tax bracket. The tax equivalent income is the extra income required from a corporate bond to equal the post-tax income of a municipal bond. See also: Municipals-over-bonds spread, After-tax basis.