Taxable Equivalent Yield Calculator

What Is Taxable Equivalent Yield (TEY)?

The Taxable Equivalent Yield (TEY) is the return that a fully taxable bond (such as a corporate bond or CD) must pay to equal the yield of a tax-exempt bond (such as a state or municipal bond). Because interest from municipal bonds is usually exempt from federal taxes and often state taxes, a lower nominal tax-free yield can produce more after-tax income than a higher nominal taxable yield.

The Taxable Equivalent Yield Formula

The mathematical formula to determine taxable equivalent yield is:

$$\text{TEY} = \frac{\text{Tax-Exempt Yield}}{1 - t}$$

where $t$ represents your combined federal and state marginal income tax rate.

Comparing Tax-Free Municipal Bonds vs. Taxable Corporate Bonds

An investor in a 30% combined tax bracket considering a 4.0% tax-exempt municipal bond would need a taxable corporate bond to yield at least 5.71% to break even:

$$\text{TEY} = \frac{4.0\%}{1 - 0.30} = 5.71\%$$

If corporate bonds are offering less than 5.71%, the municipal bond generates a higher net payout after taxes.