About Tax-Equivalent Yield Calculator
Tax-Equivalent Yield (TEY) is an essential tool for investors comparing taxable and tax-free investments. When choosing between corporate bonds and municipal bonds, the coupon rate alone doesn't tell the full story — you must account for taxes. For example, a municipal bond yielding 3.5% is equivalent to a 4.61% taxable bond for an investor in the 24% tax bracket. This calculator supports both directions: converting tax-free yields to taxable equivalents and vice versa, helping you make more informed investment decisions.
FAQ
What is the marginal tax rate?
The marginal tax rate is the tax rate applied to your last dollar of income. Use your highest applicable tax bracket, not your average rate, when calculating tax-equivalent yield. In the US, federal income tax uses progressive brackets.
Which investments are tax-free?
Municipal bonds in the US are typically exempt from federal income tax, and sometimes state tax if you reside in the issuing state. US Treasury securities are exempt from state and local taxes but not federal. Certain retirement accounts like Roth IRAs grow tax-free.
When should I choose tax-free investments?
Choose tax-free investments when their tax-equivalent yield exceeds the yield of comparable taxable investments. The higher your marginal tax rate, the more advantageous tax-free investments become.