1. What Is Taxable Equivalent Yield?

Taxable Equivalent Yield (TEY) is a measure that allows investors to compare the return on a tax-exempt investment to that of a taxable investment. It calculates the yield a taxable investment would need to generate to equal the after-tax return of a tax-exempt investment.

2. How Does The Calculator Work?

The calculator uses the Taxable Equivalent Yield formula:

Where:

• \( Yield \) — The tax-exempt yield (expressed as a percentage)
• \( Tax \) — The investor's marginal tax rate (expressed as a decimal)

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

3. Importance Of Taxable Equivalent Yield

Details: TEY is crucial for investment decision-making, particularly when comparing municipal bonds (which are often tax-exempt) with taxable bonds or other investments. It helps investors make informed choices based on their specific tax situations.

4. Using The Calculator

Tips: Enter the tax-exempt yield as a percentage and your marginal tax rate as a decimal (e.g., 0.25 for 25%). Both values must be valid (yield ≥ 0, 0 ≤ tax < 1).

5. Frequently Asked Questions (FAQ)

Q1: Why is taxable equivalent yield important for investors?
A: It allows investors to compare tax-exempt and taxable investments on an equal basis, helping them choose the option that provides the best after-tax return.

Q2: How do I determine my marginal tax rate?
A: Your marginal tax rate is the tax rate you pay on your highest dollar of income. This can typically be found by consulting current tax brackets or consulting with a tax professional.

Q3: Does this calculation work for all types of tax-exempt investments?
A: While commonly used for municipal bonds, the TEY calculation can be applied to any tax-exempt investment when comparing it to taxable alternatives.

Q4: Are there any limitations to this calculation?
A: The calculation assumes the investor's marginal tax rate remains constant and doesn't account for state and local taxes, which may also affect the comparison.

Q5: Should I always choose the investment with the highest TEY?
A: While TEY is an important factor, investors should also consider other aspects such as risk, liquidity, and investment objectives when making decisions.