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.
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The taxable equivalent yields in the table are calculated using the Federal income tax rate of 31%.
Municipal bond price transparency: what it means for issuers
Very often, municipals will trade at taxable equivalent yields higher than CDs or Treasuries and equivalent to corporate bonds of equal credit rating.
Municipal bonds: the choice of wise investors
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:
Chapter 34 Measuring yield
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%].
Chapter 44 Tax-efficient investment strategies
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.
Investing excess corporate cash

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