tax-equivalent yield

(redirected from Equivalent Taxable Yields)

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%.
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Because munis typically pay lower coupon rates, they are most attractive to high-income investors whose after-tax return will be higher despite lower rates of interest (see table of Equivalent Taxable Yields on page 122).
The following table provides equivalent taxable yields based upon assumed tax-exempt yields in one-quarter percent increments from 2.
Equivalent Taxable Yields 2011 Federal Income Tax Brackets Tax Exempt 15% 25% 28% 33% 35% Yield 2.
The following formula can be used to determine the equivalent taxable yield for Jane, who is considering investing in a 4.
The table at right shows the equivalent taxable yields for the five current federal tax rates.
To determine whether a particular investor would benefit from investing in municipal bonds, CPAs must convert the tax-free return to an equivalent taxable yield, as described in the sidebar on page 52.
htm Equivalent Taxable Yields 2010 Federal Income Tax Brackets Tax Exempt Yield 15% 25% 28% 33% 35% 2.

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