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."

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.

Investment dictionary. . 2012.

Look at other dictionaries:

  • tax-equivalent yield — The pre tax yield required from a taxable bond in order to equal the tax free yield of a municipal bond. Bloomberg Financial Dictionary …   Financial and business terms

  • taxable equivalent yield — ( TEY) The yield that a tax free investment would provide to an investor if the tax free yield was grossed up by the amount of taxes not paid. This is the most common way of comparing yields on taxable and tax free investments. Instead of… …   Financial and business terms

  • corporate equivalent yield — A comparison of the after tax yield of government bonds selling at a discount and corporate bonds selling at par. Bloomberg Financial Dictionary …   Financial and business terms

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  • Tax-Exempt Security — A security in which the income produced is free from federal, state and local taxes. Most tax exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. For some investors, U.S.… …   Investment dictionary

  • Yield Equivalence — The interest rate on a taxable security that would render a return equivalent to that of a tax exempt security, and vice versa, calculated as follows: In order to calculate yield equivalence, divide the tax exempt yield by 1 minus the investor s… …   Investment dictionary

  • Yield — The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment s cost, its current market value or its face value. This seemingly… …   Investment dictionary

  • Equivalent taxable yield — The yield that must be offered on a taxable bond issue to give the same after tax yield as a tax exempt issue. The New York Times Financial Glossary …   Financial and business terms

  • equivalent taxable yield — The yield that must be offered on a taxable bond issue to give the same after tax yield as a tax exempt issue. Bloomberg Financial Dictionary …   Financial and business terms

  • tax system —    Spain s tax system is, from 1998, in the process of being reformed. The number of income tax brackets was reduced from eighteen in 1996 to ten in 1997, and a further reduction to six was proposed in 1998. Prior to these reforms, rates ranged… …   Encyclopedia of contemporary Spanish culture

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