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tax-equivalent yield

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Tax-equivalent yield
The pre-tax yield required from a taxable bond in order to equal the tax-free yield of a municipal bond.
tax-equivalent yield
The pretax yield that provides the same return as a specified aftertax yield. Tax-equivalent yield is calculated by dividing tax-free yield by the difference obtained from subtracting the applicable tax rate from 1. For example, for an investor who pays taxes at a rate of 40%, an aftertax yield of 6% has a tax-equivalent yield of 0.06/(1 - 0.4), or 10%.


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