Tax-Equivalent Yield Calculator
The yield a taxable investment must pay to match a tax-free one at your tax rate, and which of two offers leaves you more after tax.
Results
What this tool does
A 3.5 % tax-free yield is worth more than it looks: at a 32 % marginal rate a taxable bond would need to pay about 5.15 % to leave you the same. The classic case is American municipal bonds, whose interest is free of federal income tax, but the comparison works for any tax-exempt or tax-favoured product against a taxed one. Use the marginal rate, the one on your last unit of income, not your average rate, and include any regional tax that applies to one product and not the other. The higher your bracket, the more the exemption is worth, which is why tax-free bonds usually pay lower nominal yields.
Formula
TEY = tax-free yield ÷ (1 − tax rate)
Variables
| Symbol | Meaning | Unit |
|---|---|---|
y | Yield of the tax-free investment | % |
tr | Your marginal tax rate on interest | % |
ty | Yield of the taxable alternative | % |
TE | Tax-equivalent yield | % |
AT | What the taxable one leaves you after tax | % |
DF | Advantage of the tax-free one, after tax | p.p. |
BE | Tax rate at which they pay the same | % |
WN | Which pays more | — |
Worked example
- Yield of the tax-free investment3.5 %
- Your marginal tax rate on interest32 %
- Yield of the taxable alternative4.8 %
- Tax-equivalent yield5.147 %
- What the taxable one leaves you after tax3.264 %
- Advantage of the tax-free one, after tax0.236 p.p.
- Tax rate at which they pay the same27.08 %
- Which pays moreThe tax-free bond pays more after tax
Limitations
- This is an informational calculator, not personalised financial advice. Rates, fees, taxes and contract conditions vary between institutions and countries.
- Tax rates and rounding rules differ between countries and sometimes between regions. Use the rate that applies to your invoice.