1. What is Taxable-Equivalent Yield?

Taxable-Equivalent Yield (TEY) is a calculation that allows investors to compare the return on tax-exempt investments (like municipal bonds) with taxable investments. It shows what yield you would need to earn on a taxable investment to match the after-tax return of a tax-exempt investment.

2. How Does the Calculator Work?

The calculator uses the TEY formula:

Where:

• \( \text{Tax-Exempt Yield} \) — The yield percentage of the tax-exempt investment
• \( \text{Tax Rate} \) — Your marginal tax rate in decimal form (e.g., 0.25 for 25%)

Explanation: The formula adjusts the tax-exempt yield to show what equivalent taxable yield would be needed to produce the same after-tax return.

3. Importance of TEY Calculation

Details: TEY helps investors make informed decisions when comparing taxable and tax-exempt investment options. It's particularly useful for high-income investors in higher tax brackets who are considering municipal bonds or other tax-advantaged investments.

4. Using the Calculator

Tips: Enter the tax-exempt yield as a percentage (e.g., 3.5 for 3.5%) and your marginal tax rate as a decimal (e.g., 0.32 for 32%). The tax rate should be between 0 and 0.999.

5. Frequently Asked Questions (FAQ)

Q1: Why is TEY important for investment decisions?
A: TEY allows you to compare tax-exempt and taxable investments on an equal basis, helping you determine which option provides better after-tax returns.

Q2: What tax rate should I use in the calculation?
A: Use your marginal tax rate - the tax rate you pay on your highest dollar of income. This is typically your federal income tax bracket.

Q3: Does TEY account for state and local taxes?
A: The basic TEY calculation typically uses federal tax rates. For more precise comparisons, you may need to factor in state and local taxes if the tax-exempt investment is also exempt from those taxes.

Q4: Are there limitations to the TEY calculation?
A: TEY assumes the investor's tax situation remains constant and doesn't account for alternative minimum tax (AMT) or other tax complexities that might affect certain investments.

Q5: When is TEY most useful?
A: TEY is most valuable for investors in higher tax brackets considering municipal bonds or other tax-exempt investments, as the tax benefits become more significant at higher income levels.