tax-equivalent yield

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 the securities portfolio was 3.35% in the first quarter of 2019 and 3.31% in the fourth quarter of 2018, both based on a 21.0% income tax rate.
The tax-equivalent yield is calculated by dividing the tax-exempt yield by the difference of one minus the investor's marginal income tax rate.
The tax-equivalent yield on non-taxable municipal securities and loans decreased due to the decrease in the statutory Federal corporate tax rate between the periods.
15, 2021, yields 5.27% and is priced at $47.52 (Note: An investor who purchases the strip at $475.20 can cash the bond in for $1,000 when it matures in 2021.) Composite Bond Rates Maturity Bond 2-Year 5-Year 10-Year Municipal Bonds * 3.65% 3.70% 3.93% Tax-equivalent yield 5.62 5.69 6.05 U.S.
In its first-quarter report for the period ended March 31, Sterling Bancorp said total loans increased 13.3 percent from the prior-year quarter as the average tax-equivalent yield on earning assets came in at 6.8 percent, compared with 7.32 percent a year earlier.
Recognizing that the spread required to induce the investor to hold both types of bonds is increased by the risk premium, we can define it as the difference between the yield on the municipal bond and the expected tax-equivalent yield on the corporate bond.
A 25-year AAA-rated muni bond is currently yielding 2.29% versus 3% for a 30-year Treasury bond, but the tax-equivalent yield for investors in the top 39.6% tax bracket, is 3.79%.
Interest income decreased USD145,000 when comparing the periods as the average tax-equivalent yield on interest-earning assets decreased from 4.85% for the three-month period ended March 31, 2012 to 4.48% for the same period in 2013, primarily as a result of lower market interest rates.
Interest income increased $1.3 million when comparing the two periods due to increases in the average balance of interest-earning assets from $685.0 million for 2016 to $708.4 million for 2017 and the average tax-equivalent yield of interest-earning assets from 3.76% for 2016 to 3.84% for 2017.
If state and local income taxes were included in the calculation, the tax-equivalent yield would be even greater for many investors.
Interest income increased $1.4 million when comparing the two periods due primarily to an increase in the average balance of interest-earning assets of $114.7 million, from $744.6 million for 2016 to $859.3 million for 2017, and an increase in the average tax-equivalent yield, from 4.49% for 2016 to 4.52% for 2017.
For instance, he explains that a municipal bond paying 3% interest pays a tax-equivalent yield of 4.6% in a 35% tax rate environment.