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Tax Equivalent Yield Calculator

Compare tax-free municipal bond yields with taxable bond yields.

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Calculation Parameters

Specify your inputs below.

Calculated Result

Tax Equivalent Yield 5.00%
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Expert Tip

Municipal bonds often look lower in yield, but their tax-exempt status makes them highly lucrative for high earners.

How this Calculator Works

This calculator computes the Tax Equivalent Yield of a tax-exempt bond (such as a municipal bond). It shows the yield a taxable bond would need to offer to match the tax-free return of the municipal bond, based on your marginal tax bracket. Income investors use it to maximize post-tax yields.

Formula & Methodology

Tax Equivalent Yield = Tax-Free Yield / (1 - Tax Rate) - Tax-Free Yield is the interest rate on the tax-exempt bond. - Tax Rate is the investor's marginal federal and state income tax rate (as a decimal).

Step-by-Step Calculation Example

Here is a step-by-step example showing how the calculations are performed:

An investor in a 30% tax bracket is considering a municipal bond offering a 3.50% tax-free yield. 1. Calculate denominator: 1 - 0.30 = 0.70. 2. Divide tax-free yield by denominator: 3.50% / 0.70 = 5.00%. Result: The Tax Equivalent Yield is 5.00%.

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Detailed Insights & Expert Guide

ℹ️ About this Calculation

This fixed income and debt investment calculator analyzes bond pricing, coupon yield to maturity (YTM), Macaulay/modified duration, credit risk spreads, and debt coverage ratios based on Wall Street fixed income analytics.

Variable Glossary

Input

Fixed Income Data

Par value ($1,000), coupon rate %, payment frequency, maturity years, corporate credit spread, or tax rate %.

Parameter

Bond Performance

Yield to Maturity (YTM %), present bond price ($), modified duration (years), or Tax-Equivalent Yield (TEY).

How to Calculate Step-by-Step

1

Step 1

Input bond face value, annual coupon interest rate, or corporate credit default swap (CDS) basis points.

2

Step 2

Select payment schedule frequency (annual, semi-annual) and years remaining until maturity date.

3

Step 3

Review calculated yield to call/maturity, interest rate sensitivity duration, or debt service coverage (DSCR).

FAQ

How does bond duration measure interest rate risk?
Modified duration estimates the approximate percentage change in a bond's price for a 1% (100 bps) shift in interest rates. Higher duration indicates greater price sensitivity to rate moves.
What is Tax-Equivalent Yield (TEY) for municipal bonds?
Tax-Equivalent Yield = Municipal Tax-Exempt Yield / (1 - Marginal Tax Rate). It shows the pre-tax yield a taxable bond would need to equal the after-tax yield of a tax-free municipal bond.
Can fixed income calculators guarantee bond trading outcomes?
No. Bond pricing models assume clean compounding yields and fixed reinvestment rates. Secondary market prices fluctuate based on liquidity, credit rating revisions, and market interest rate movements.