Taxable equivalent yield


Also found in: Acronyms.

Taxable equivalent yield

The return from a higher-paying but taxable investment that would equal the return from a tax-free investment. This depends on the investor's tax bracket.

Taxable 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 paying 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 taxable equivalent yield is the extra yield required on a corporate bond to equal the yield of a municipal bond. See also: Municipals-over-bonds spread, After-tax basis.
References in periodicals archive ?
The taxable equivalent yields in the table are calculated using the Federal income tax rate of 31%.
Very often, municipals will trade at taxable equivalent yields higher than CDs or Treasuries and equivalent to corporate bonds of equal credit rating.
This section is designed to clarify the meaning and distinctions among: coupon rate, yield-to-maturity, after-tax yield, taxable equivalent yield, current yield, realized compound yield, and yield-to-call.
In the case of a nontaxable bond (municipal bond), the process can be reversed to determine the taxable equivalent yield of a tax-free bond:
It is useful to convert a taxable yield to an after-tax yield, and to convert a tax exempt yield to a taxable equivalent yield (or tax exempt equivalent).
If the expected semi-annual yield-to-maturity is 2.625% and the tax rate is 25%, the tax exempt equivalent (or taxable equivalent yield) would be 3.5% on a semi-annual basis [2.625% + (1 - 25%) = 3.5%].
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.