Tax-Equivalent Yield Calculator
Is the tax-free bond really better than the taxable one?
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Tax-Equivalent Yield Calculator by TheCalcTools
How the Tax-Equivalent Yield Calculator works
Enter the yield of a tax-exempt bond and your marginal tax rate.
The tax-equivalent yield is what a taxable bond would need to pay to match it.
Compare it with the taxable yield you are offered.
The formula
Worked example
Using the default values shown in the calculator:
| Tax-free yield | 3.5 % |
|---|---|
| Your marginal tax rate | 24 % |
| Taxable yield to compare | 4.2 % |
- 3.5% ÷ (1 − 0.24) = 4.61% tax-equivalent.
- The taxable 4.2% leaves 3.19% after tax, so the better choice is: Tax-free.
Result:
| Tax-equivalent yield | 4.61% |
|---|---|
| After-tax yield of the taxable option | 3.19% |
| Better choice | Tax-free |
Frequently asked questions
Who benefits most?
Investors in higher tax brackets, because the tax exemption is worth more.
What else should I check?
State and local taxes, credit quality, call features and whether the bond interest affects other tax calculations such as alternative minimum tax.
Sources and further reading
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This calculator gives estimates for information only. It is not financial advice, and your lender's or provider's figures will govern. Rates, fees and rules vary. See our disclaimer.