Fully Taxable Equivalent Yield

DEFINITION of 'Fully Taxable Equivalent Yield'

The yield on a municipal bond, when the effect of reduced taxes are taken into account. The fully taxable equivalent yield shows what yield a fully taxable bond would have to give, in order to be equivalent to a tax free municipal bond. The yield is calculated as:

Yield on a Municipal Bond
1 - Tax Rate

BREAKING DOWN 'Fully Taxable Equivalent Yield'

Investors use the fully taxable equivalent yield to determine whether they will get the same value from a municipal bond, as they would from a taxable bond. Yields on municipal bonds are generally lower than taxable bonds, so the tax implications of having the municipal bond, must outweigh the gap between the two bond types.