Audited 05 Aug 2026·Last updated 15 Sept 2026·3 citations·Tier 2·0 uses

Taxable Equivalent Yield Calculator

Taxable equivalent yield calculator: TEY = tax-exempt yield ÷ (1 − marginal rate). Compare municipal bond yields with taxable bonds at your combined tax rate.

Taxable Equivalent Yield Calculator

%
%
Taxable-equivalent yield
5.88
Primary result from the named standard variant.

Background.

A 4% municipal bond and a 5% corporate bond — which pays more? Wrong question, until tax enters. The muni's coupon is generally exempt from federal income tax, so its 4% arrives whole, while the corporate's 5% is taxed at your marginal rate before you keep anything. The taxable-equivalent yield puts both on one scale: TEY = tax-exempt yield ÷ (1 − marginal tax rate), the yield a taxable bond would need to match the muni after your taxes.

At a 32% marginal rate, a 4% tax-exempt yield is equivalent to 4 ÷ 0.68 ≈ 5.88% taxable — so against that muni, the 5% corporate actually loses. At a 12% rate the same muni equates to only 4.55%, and the corporate wins. That reversal is the whole economics of the municipal market: tax exemption is worth more the higher your bracket, which is why munis concentrate in high-bracket portfolios and why issuers can borrow below Treasury rates.

The rate to divide by is your combined marginal rate on the interest at stake — federal bracket, plus the 3.8% net investment income tax if it applies to you, plus state tax where relevant. States add a wrinkle worth knowing: most exempt their own municipalities' bonds but tax out-of-state munis, so an in-state bond earns the full combined-rate division while an out-of-state one merits only the federal-rate division.

Equivalence in yield is not equivalence in investment: the formula deliberately says nothing about credit quality, call features, liquidity, AMT-subject private-activity bonds, or the different capital-gains treatment if you sell. It converts units — after-tax to pre-tax — so a fair comparison can start, as the scope note beside the result records.

What is taxable equivalent yield calculator?

Taxable-equivalent yield (TEY) is the pre-tax yield a taxable bond must offer to leave you the same after-tax income as a given tax-exempt bond: TEY = tax-exempt yield / (1 − t), where t is your combined marginal tax rate on interest income. It exists because quoted yields are pre-tax while what investors keep is post-tax: dividing the exempt yield by your keep-fraction restates it in taxable-bond units. The comparison is bracket-specific by construction — the same municipal bond is ‘worth’ 5.88% to a 32%-bracket investor and only 4.55% to a 12%-bracket one.

How to use this calculator.

  1. Enter the tax-exempt yield — for a fair comparison use the muni's yield-to-worst (the lower of yield-to-call and yield-to-maturity), the convention bond quotes favour.
  2. Enter your combined marginal rate on interest: federal bracket, plus 3.8% NIIT if your income triggers it, plus your state rate when the bond's interest would be state-taxable in your hands.
  3. Read the taxable-equivalent yield and set it beside taxable candidates of similar maturity and credit quality — Treasuries, agencies, corporates.
  4. For an out-of-state muni in a state that taxes it, run the division with the federal-only rate; for an in-state muni, the full combined rate — the in-state bond's equivalent yield will be higher.
  5. Treat a TEY win as necessary, not sufficient: confirm credit rating, call schedule, and whether the bond is AMT-subject before the yield comparison decides anything.

The formula.

Taxable-equivalent yield=tax-exempt yield/(1-marginal tax rate)
taxExemptYield · Tax-exempt yieldmarginalTaxRate · Combined marginal tax rate

After-tax income from a taxable yield y at marginal rate t is y·(1 − t); a tax-exempt yield y_m is kept whole. Setting them equal — y·(1 − t) = y_m — and solving gives y = y_m/(1 − t): the division simply inverts the tax haircut. The denominator is your keep-fraction, which is why the formula amplifies more the higher your bracket — at t = 0.12 the multiplier is 1.136, at t = 0.32 it is 1.47, at t = 0.408 (37% + NIIT) it is 1.69. Marginal, not effective, is the correct t: the investment decision concerns the next dollars of interest, which are taxed at the margin. The same algebra runs in reverse for checking a taxable bond against munis — its after-tax yield is y·(1 − t) — and generalises to any partial exemption by using the rate actually avoided. The engine converts the percentage, subtracts, and divides in Decimal arithmetic, rounding once to twelve significant digits.

A worked example.

Example

An investor in the 32% combined marginal bracket is offered a municipal bond yielding 4% tax-exempt, and wants to know what a taxable bond must pay to compete. The keep-fraction on taxable interest is 1 − 0.32 = 0.68 — at this bracket, sixty-eight cents of every taxable interest dollar survives. The equivalence: TEY = 4 / 0.68 = 5.882… ≈ 5.88%. Reading it against the market: a 5.5% corporate bond of similar quality loses to this muni after tax (5.5 × 0.68 = 3.74% kept, versus the muni's 4.0), while a 6.2% corporate beats it. The bracket-dependence is the deeper lesson — for a 22%-bracket investor the same muni equates to only 4/0.78 = 5.13%, so a 5.5% corporate wins for them. One bond, two investors, opposite conclusions, both correct: tax-exempt paper is worth exactly what your bracket makes it worth, which is why the division must use your rate, not a generic one.

marginal Tax Rate32
tax Exempt Yield4

Frequently asked questions.

Which tax rate should I divide by?
Your combined marginal rate on the interest at stake: the federal bracket your next dollars fall in, plus the 3.8% net investment income tax if your modified AGI crosses its threshold, plus your state (and city) rate when that state would tax this bond's interest. Marginal — not the lower effective average — because the decision is about incremental interest income. At 24% federal + NIIT + a 6% taxable state, the honest t is about 33.8%, not 24.
How does state tax change the muni comparison?
Through a home-state advantage. Most states exempt interest on their own issuers' bonds but tax out-of-state munis, so an in-state bond's TEY divides by the full combined rate while an out-of-state one divides by roughly the federal-only rate. For a Californian in high brackets the wedge is large — which is why single-state muni funds exist. A handful of states (and Treasuries' mirror-image rule: state-exempt, federally taxable) complicate the map; the principle is one rate per bond, reflecting the tax actually avoided in your hands.
Are municipal bonds always tax-free?
No — the exemption covers most munis' coupon interest at the federal level, but private-activity bonds can be subject to the alternative minimum tax, taxable munis exist outright (Build America Bonds, some refundings), out-of-state bonds face state tax as above, and capital gains from selling any muni above your basis are taxed normally — including the ‘de minimis’ rule that can convert deep-discount muni appreciation into ordinary income. Check the bond's tax status line before applying the exemption arithmetic.
If the TEY beats the corporate's yield, should I just buy the muni?
Only if everything else is comparable — the formula equates yields, not bonds. Match maturity (comparing a 10-year muni's TEY to a 2-year corporate's yield mixes term premia), credit quality (a AA muni against a BBB corporate isn't a tax question), and optionality — most munis are callable, so use yield-to-worst, and recognise that a call cuts the tax advantage short. Liquidity also differs; muni markets trade thinner than Treasuries. TEY earns a bond a seat at the comparison table, nothing more.
Do municipal bonds make sense inside an IRA or 401(k)?
Almost never — the account is already tax-sheltered, so the exemption you are paying for (in the form of the muni's lower coupon) buys nothing. The formula shows it directly: inside a tax-deferred account the applicable t on bond interest is 0, the divisor is 1, and the muni's 4% is equivalent to exactly 4% — against which taxable bonds of similar risk typically yield more. Asset-location doctrine follows: taxable bonds in sheltered accounts, munis (if your bracket justifies them) in taxable accounts.

References& sources.

  1. [1]OpenStax, Rice University. Principles of Finance, 2022. Chapters 6–10. Retrieved 2026-08-06. independence: primary; access: open.
  2. [2]U.S. Internal Revenue Service. Tax guidance current 2026. Official forms, instructions and tax topics. Retrieved 2026-08-06. independence: secondary-check; access: open.
  3. [3]U.S. Securities and Exchange Commission. Investor.gov current 2026. Investment products and risk. Retrieved 2026-08-06. independence: primary; access: open.

How this page was produced

Published by
Quanta Calculator
Primary sources
3 cited below
Method
Taxable-equivalent yield=tax-exempt yield/(1-marginal tax rate)
Published
Last verified

Built with AI assistance and verified by automated tests against the cited sources — every worked example on this page is computed by the same code that runs the calculator. How we build and check calculators.

Related calculators
5
Future Value CalculatorinvLoan Repayment CalculatorloaAlabama Tax CalculatorbusMortgage CalculatormorCompound Interest Calculatorinv

In this category

Embed

Quanta Pro

Paid features are coming later.

  • All 1560 calculators remain free
  • No billing is enabled
Coming soon