tax-equivalent yield

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 yield of a taxable investment that equals the yield of a tax-free investment with a lower stated yield. 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 yield is the extra yield required on a corporate bond to equal the post-tax yield of a municipal bond. See also: Municipals-over-bonds spread, After-tax basis.

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%.
References in periodicals archive ?
The decline in interest revenue resulted primarily from an 89 basis point decrease in the tax-equivalent yield on earning assets to 5.
2 million increase in average earning assets coupled with a 36 basis point increase in the tax-equivalent yield on earning assets.
The shift into loans, which had a first quarter 2008 average tax-equivalent yield of 6.
Within earning assets, the fourth quarter 2007 average tax-equivalent yield for loans declined 27 basis points, while the average tax-equivalent yield for investment securities declined 2 basis points.
An 83 basis point improvement in the tax-equivalent yield on earning assets, coupled with growth of $7.
With regard to interest revenue, the improvement primarily resulted from an 81 basis point increase in the tax-equivalent yield on earning assets.
As a result, on a quarter to quarter basis the average tax-equivalent yield on earning assets increased 40 basis points while the average cost of interest-bearing liabilities was up 98 basis points.
2 million in average earning assets, coupled with a 22 basis point improvement in the tax-equivalent yield on earning assets, led to the increase in interest revenue.
The tax-equivalent yield on the loan portfolio decreased to 4.
3 percent from the prior-year quarter as the average tax-equivalent yield on earning assets came in at 6.
Recognizing that the spread required to induce the investor to hold both types of bonds is increased by the risk premium, we can define it as the difference between the yield on the municipal bond and the expected tax-equivalent yield on the corporate bond.
Treatment of a portion of the dividends as qualified dividend income or long-term capital gains has the effect of providing individual preferred stockholders with a higher ordinary income tax-equivalent yield.