Tax-Equivalent Yield Calculator
Compare tax-free and taxable bond yields on an equal footing. Calculate the tax-equivalent yield of a muni bond, compare two bonds head-to-head, or find the break-even tax rate. Works with any currency.
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How to Use This Calculator
Tab "Tax-Equivalent Yield"
Enter the tax-free yield of a municipal bond and your marginal tax rate. The calculator shows the equivalent yield a taxable bond would need to offer for you to end up with the same after-tax income. If a taxable bond yields less than this number, the muni is the better deal.
Tab "Compare Bonds"
Enter both a tax-free bond yield and a taxable bond yield, along with your tax rate. The calculator computes each bond's after-tax return and tells you which one wins, plus the exact difference in after-tax yield.
Tab "Break-Even Tax Rate"
Enter a tax-free yield and a taxable yield. The calculator finds the marginal tax rate at which both bonds produce the same after-tax return. If your rate exceeds the break-even, the muni wins; if it is below, the taxable bond wins.
The Formulas
TEY = Tax-Free Yield / (1 − Marginal Tax Rate)
After-tax yield (taxable bond):
After-Tax Yield = Taxable Yield × (1 − Tax Rate)
Break-even tax rate:
Break-Even Rate = 1 − (Tax-Free Yield / Taxable Yield)
All calculations are universal and pre-tax at the state/local level. No country-specific tax brackets, AMT, or state tax exemptions are applied. Results are estimates.
Worked Examples
Example 1 — Muni bond 3.5% at 35% marginal tax rate
An investor in the 35% federal tax bracket holds a municipal bond yielding 3.5%. What taxable yield would they need to match this?
A taxable bond must yield at least 5.38% to deliver the same after-tax income as the 3.50% muni. The higher the tax bracket, the larger the muni's advantage.
Example 2 — Compare muni 3.8% vs corporate 5.5% at 35% tax
An investor compares a 3.8% municipal bond to a 5.5% corporate bond. Their marginal tax rate is 35%.
Even though the corporate bond yields 5.50% on paper, after a 35% tax rate its effective yield drops to 3.58% — below the 3.80% muni. The tax-free bond wins by 0.23 percentage points.
Example 3 — Break-even tax rate: 3.5% muni vs 5.0% taxable
At what tax rate do a 3.5% muni bond and a 5.0% taxable bond produce the same after-tax return?
The muni is the better choice for anyone whose marginal tax rate exceeds 30%. Below 30%, the taxable bond delivers a higher after-tax return.
Understanding Tax-Equivalent Yield
Why Tax-Equivalent Yield Matters
Comparing a tax-free bond to a taxable bond by their stated yields is misleading. A 3.5% muni might actually deliver more income than a 5% corporate bond once taxes are deducted. Tax-equivalent yield puts both on the same footing so you can make an apples-to-apples comparison.
Who Benefits Most from Munis?
Investors in higher tax brackets benefit most from tax-exempt bonds. At a 37% marginal rate, a 4% muni is equivalent to a 6.35% taxable bond — a spread that is hard to find without taking on significantly more credit risk. Investors in lower brackets may find taxable bonds more attractive.
State and Local Tax Considerations
Municipal bonds issued in your state of residence are often exempt from state and local income tax as well, which can increase the effective tax-equivalent yield further. This calculator uses only the rate you enter, so for a complete picture, combine your federal and state marginal rates.
Limitations
This calculator does not account for the Alternative Minimum Tax (AMT), capital gains on bond sales, state tax exemptions, or credit risk differences between issuers. It provides a directional comparison — consult a tax adviser for investment decisions.