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Tax Equivalent Yield Calculator
Compare tax-free and taxable bond yields
Taxable Investment Is Better
The after-tax yield on the taxable bond (3.80%) exceeds the tax-free yield (3.50%) by 0.30%.
4.61%
Taxable yield equivalent to 3.50% tax-free at 24.00% tax rate
3.80%
Net return on 5.00% taxable yield
$173.13
Tax-free benefit
Inputs
5
Annual Returns
Tax-Free Annual Income
$350.00
Taxable Annual Income (before tax)
$500.00
Annual Taxes Paid
$120.00
Yield Comparison by Tax Rate
Investment Growth (5 Years)
Total Returns (5 Years)
| Metric | Tax-Free | After-Tax Taxable |
|---|---|---|
| Initial Investment | $10,000.00 | $10,000.00 |
| Total Interest/Gains | $1,876.86 | $2,049.99 |
| Total Taxes Paid | $0.00 | $712.82 |
| Final Value | $11,876.86 | $12,049.99 |
Understanding TEY
Tax Equivalent Yield (TEY)
The yield a taxable bond must pay to match the after-tax return of a tax-free bond. Formula: TEY = Tax-Free Yield รท (1 - Tax Rate)
When Tax-Free Bonds Make Sense
- You're in a high tax bracket (32% or higher)
- The tax-free yield is within 1-2% of taxable yields
- You want to reduce taxable income
- Investment is for long-term holding
Tax Considerations
- Municipal bond interest is usually free from federal tax
- Some may be free from state and local taxes
- Capital gains on municipal bonds are taxable
- Alternative Minimum Tax (AMT) may apply in some cases
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