The after-tax yield is the yield on a taxable bond after federal income taxes are paid. It is computed with the following formula.
|After-tax yield = pre-tax yield x (1- marginal rate)|
The marginal rate will vary depending on the tax bracket the investor is at that given time.
Example: Taxable Bond Yield
Taxable bond yield is 7.5%
The Marginal tax rate for this investor is 31%
After-tax yield = .075 x (1-.31)
The tax-equivalent yield is the yield that must be offered on a taxable bond issue to give the same after-tax yield as a tax-exempt issue. It is computed with the following formula.
|Taxable-equivalent yield = tax-exempt yield / (1- marginal tax rate)|
Example: Tax-Exempt Yield
Tax exempt yield = 5.00%
Marginal Tax Rate = 31%
Taxable-equivalent yield = .05 / (1-.31)
= .05 / .69
= 7.2464 %
This means that a taxable issue must yield more than 7.25 % for the investor at the 31% tax bracket in order to beat the 5% yield offer in the tax-exempt bond.
Notice that the higher the marginal tax rate, the higher the taxable equivalent yield would be needed in the taxable bond market.
London Interbank Offer Rate (LIBOR)
RetirementInterest may not be tax-exempt for seniors with Medicare or Social Security benefits.
InvestingAny investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
InvestingLearn about three tax strategies that reduce taxable income and minimize the share of taxes paid on employer-sponsored and individual investment accounts.
RetirementRetirees that have a tax-efficient investing and distribution plan in place may be able to keep more of their hard-earned wealth.
InvestingYield to worst is the lowest possible yield on a bond that may be called in the future.
InvestingThe bond equivalent yield calculates the semi-annual, quarterly or monthly yield on a discount bond or note.
InvestingSeveral factors affect the taxable interest that must be reported. Learn more here.
InvestingLearn these basic terms to breakdown this seemingly complex investment area.
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