# Equivalent taxable yield

## Equivalent taxable yield

## Taxable Equivalent Yield

## Tax-Equivalent Yield

## equivalent taxable yield

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_{0.6}, or 15%, to produce the same aftertax equivalent.

Analyze investments for risk related to return (payout and growth) and yield. Tax-free securities have less risk, but their return is usually lower than riskier growth investments, corporate bonds, or preferred stocks. Determine the equivalent taxable yield of a tax-free security (yield divided by the difference of one minus your marginal tax bracket). Compare the investment to alternative securities with similar or higher yields or returns. Invest for a higher return if you are comfortable with the risk. Tax-free securities make sense for high-income taxpayers looking for safer, certain returns.

Jeffrey S. Levine, CPA, MST, Alkon & Levine, PC, Newton, MA## Equivalent taxable yield.

While taxable bonds normally pay higher interest rates than tax-exempt bonds, they sometimes provide a lower overall yield.

Finding the equivalent taxable yield lets you determine the minimum interest rate a taxable bond must pay to equal the yield of a comparable tax-exempt bond. The formula for the equivalent taxable yield is tax-exempt interest rate ÷ (100 - your tax rate).

So, for example, if a municipal bond pays an annual interest rate of 7%, and your tax rate is 35%, the equivalent taxable yield would be 7 ÷ (100 - 35) = 10.8%. That means that in order to be as attractive an investment as the 7% municipal bond, a taxable bond would need to pay an annual interest rate of 10.8% or more.