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 taxable equivalent yields in the table are calculated using the Federal income tax rate of 31%.
A benchmark for the municipal market at large, the table shows yields of insured triple A-rated revenue bonds in maturities of two, five, seven, 10, 15, 20, and 30 years with comparisons for the federal taxable equivalent yield at a 31 percent tax rate.
Very often, municipals will trade at taxable equivalent yields higher than CDs or Treasuries and equivalent to corporate bonds of equal credit rating.
Experienced corporate investors also need systems that give them the capability to compute yields quickly and accurately and to put into a single yield formula a number of different instruments-treasuries, government agencies, corporates, bank obligations, taxable equivalent yields for tax-exempt securities-in such a way that they are truly comparable.