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 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 tax equivalent yield on average loans for the quarters ended June 30 and March 31, 2015 was 4.
6 percent would clearly be better off investing in tax-free municipal bonds, since the tax equivalent yield of 3.
94% tax equivalent yield at the highest income tax bracket (35% as of May).
If you are in the 36 percent tax bracket, your tax equivalent yield on a 6 percent municipal bond would be 9.
Also contributing to the improvement were increases in higher yielding securities balances, primarily due to highly-rated tax-exempt municipal securities at relatively high tax equivalent yields and a continuing improvement in the overall interest-earning asset mix.

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