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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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%.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
The tax equivalent yield on investment securities was 2.92% compared to 2.88% for the three months ended June 30, 2018.
The decrease in the tax rate results in a lower tax equivalent yield on tax-exempt assets.
The tax equivalent yield on average loans for the quarters ended June 30 and March 31, 2015 was 4.65 percent and 4.64 percent, respectively.
An investor in the maximum tax bracket of 39.6 percent would clearly be better off investing in tax-free municipal bonds, since the tax equivalent yield of 3.91 percent for a 10-year bond beats the rate on Treasuries of the same maturity.
It provides federally tax-free and attractive tax equivalent yields for clients who need "greater tax efficiency in their portfolios," she says, The bond's yield of 1.91% equals a 2.94% tax equivalent yield at the highest income tax bracket (35% as of May).
5.50 6.06 6.03 * Tax equivalent yield using 35% tax rate on Corporates and 5.25% effective rate on Municipals.
Treasury bonds (where income is exempt from state and local, but not federal taxes) and corporate bonds (where income is fully taxable), the "tax equivalent yield" can be considerable.
The overall tax equivalent yield on the securities portfolio improved 25 basis points from 2.96% for the fourth quarter of 2015 to 3.21% for the first quarter of 2016.
Overall, tax equivalent yield ("TEY") on average earning assets increased by 16 basis points in the fiscal 2016 second quarter, compared to the fiscal 2015 second quarter, primarily driven by improved earning asset mix, including a 27% increase in average balances within the loan portfolio, and increased volume and yields achieved in other investments, particularly the tax exempt municipal securities, and improved yields on MBS.
The tax equivalent yield on loans decreased 29 basis points to 5.02% while the average loan balance increased $52.28 million, or 3.12%, to $1.73 billion.
The average tax equivalent yield on earning assets increased from 3.64% in the first quarter of 2015 to 3.80% for the first quarter of 2016.

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