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Taxable-Equivalent Yield Calculator

Enter your muni yield and marginal tax rate to find the equivalent taxable yield.

Result

5.15%
1.65%
32.00%

How it is calculated

The tool asks what pre-tax yield a taxable bond must pay to leave you the same after-tax return as the tax-free bond. Formula: TEY = tax-free yield / (1 − tax rate / 100). Both inputs are percentages (yield per year, marginal tax rate). The result is shown with 2 decimals, along with the pick-up, TEY − tax-free yield, in percentage points, and your tax rate echoed back. A tax rate of 100 or more gives no result, because the formula would divide by zero or a negative number. The rate you enter is the marginal rate on the next dollar of interest, not your average rate, and it should include state tax only if the bond is also exempt from it.

Worked example

A municipal bond yields 3.5% and your marginal tax rate is 32%. TEY = 3.5 / (1 − 0.32) = 3.5 / 0.68 = 5.15%. The pick-up is 5.15 − 3.50 = 1.65 percentage points. So a taxable bond must pay about 5.15% before tax to match the muni: 5.15% less 32% tax leaves 3.5%. Any taxable bond with a lower yield than 5.15% leaves you with less after tax than the muni.

Try this example →

Common mistakes

  • Using your average tax rate instead of your marginal rate. The tax saved on the next dollar of interest is taxed at the marginal rate, so that is the figure to enter.
  • Entering the tax rate as a decimal (0.32). It is a percentage, so 32% is 32.
  • Including state tax when the bond is not exempt from it. Only add state tax to the rate if the interest is exempt from it as well.
  • Reading the pick-up as extra return you earn. It is the extra yield a taxable bond would need, in percentage points, to equal the muni.
  • Comparing bonds that differ in credit quality or maturity by TEY alone. TEY only adjusts for tax, not for risk or length.

Sources

About this calculator

Municipal bonds pay interest that is typically exempt from federal (and sometimes state) income tax, so comparing their yield directly to a taxable bond's yield understates how attractive the muni actually is. The taxable-equivalent yield (TEY) fixes this: TEY = tax-free yield ÷ (1 − marginal tax rate).

The formula essentially asks how large a taxable yield would need to be before taxes to leave the investor with the same after-tax income as the tax-free muni — the higher an investor's marginal tax rate, the larger that required taxable yield becomes, which is why munis are especially attractive to investors in higher tax brackets.

Fixed-income investors and financial advisors use TEY to compare a municipal bond against corporate bonds, Treasuries, or CDs on an apples-to-apples, after-tax basis before deciding where to allocate.

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