Tax-Equivalent Yield

AAA

DEFINITION of 'Tax-Equivalent Yield'

The pretax yield that a taxable bond needs to possess for its yield to be equal to that of a tax-free municipal bond. This calculation can be used to fairly compare the yield of a tax-free bond to that of a taxable bond in order to see which bond has a higher applicable yield.

Tax-Equivalent Yield



Also known as "after-tax yield."

INVESTOPEDIA EXPLAINS 'Tax-Equivalent Yield'

For example, if a tax-free bond has a yield of 20% and the tax rate is 10%, a taxable bond would need a pretax yield of 22.2% (20% / 90%) in order to be considered an equivalent investment. Therefore, all bonds with the same risk but with a pretax yield of less than 22.2% should be considered inferior investments compared to the 20% municipal bond.

RELATED TERMS
  1. Transportation Bond

    Fixed-income obligations of issuers that own and operate transportation ...
  2. Unlimited Tax Bond

    A municipal bond that is backed by the pledge of the issuer (generally ...
  3. Telephone Bond

    Bonds issued by telephone companies, or obligations of issuers ...
  4. Municipal Bond Arbitrage

    A strategy that consists of building a portfolio of tax-exempt ...
  5. Bond

    A debt investment in which an investor loans money to an entity ...
  6. Yield

    The income return on an investment. This refers to the interest ...
Related Articles
  1. Retirement

    Immediate Annuities: More Income and Lower Taxes

    These instruments may shed their bad rap to bring you a hefty tax break.
  2. Bonds & Fixed Income

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  3. Taxes

    Why Retirees Can't Count On Muni Bonds

    Interest may not be tax-exempt for seniors with Medicare or Social Security benefits.
  4. Taxes

    Weighing The Tax Benefits Of Municipal Securities

    Find out how to determine whether the tax exemption offered by "munis" benefits you.
  5. Investing

    Where can I buy government bonds?

    The type of bond determines where you can purchase it, so you need to decide which type of bond you would like to purchase first.Bonds are debt obligations. Federal bonds are issued by the federal ...
  6. Bonds & Fixed Income

    How does quantitative easing in the U.S. affect the bond market?

    See why it is very difficult to evaluate the impact of the Federal Reserve's quantitative easing, or QE, program on bond prices and yields.
  7. Mutual Funds & ETFs

    How much of my total assets should I be keeping in my money market account?

    Investing a portion of total assets in a cash position such as a money market account provides investors access to funds in the case of an emergency.
  8. Bonds & Fixed Income

    How does preferred stock differ from company issued bonds?

    Discover the primary differences between preferred stock and corporate bonds, two income-generating investment vehicles issued by certain companies.
  9. Fundamental Analysis

    What's the difference between r-squared and correlation?

    Discover how R-squared calculations determine the practical usefulness of beta and alpha correlations between individual securities and aggregate indexes.
  10. Bonds & Fixed Income

    What is the difference between yield to maturity and the yield to call?

    Determining various the various yields that callable bonds can provide investors is an important factor in the bond purchasing process.

You May Also Like

Hot Definitions
  1. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  2. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  3. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  4. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  5. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  6. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
Trading Center