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equivalent taxable yield business definition

The taxable return that must be achieved in order to equal, on an aftertax basis, a given tax-exempt return. Equivalent taxable yield is calculated by dividing the available tax-exempt yield by one minus the investor's marginal tax rate. For example, a tax-exempt return of 4% for an investor in a 40% marginal tax bracket would require a taxable return of ^0.4/_0.6 , or 6.67%, to produce the same aftertax equivalent.

My broker has advised me that I should consider investing in municipal bonds. How can I decide if municipal bonds are right for me?

Municipal bonds are exempt from federal income taxes (and in some cases from state income taxes) and, therefore, would have a lower interest rate than taxable bonds with the same risk, liquidity, and maturity. Use the formula at equivalent taxable yield to calculate the after-tax equivalent yield of the municipal bond you are considering and compare it to the yield of a taxable bond with the same risk, liquidity, and maturity. If the municipal bond has a higher yield than the bond with taxable interest, other things equal, then it may be right for you.

Michael W. Butler, PhD, Professor of Economics, Angelo State University, San Angelo, Texas

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equivalent taxable yield business definition

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