- 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.
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. Academic. 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
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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
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