Financial term · Reviewed August 17, 2026
Tax-equivalent yield
Tax-equivalent yield: The taxable yield needed to equal a tax-exempt yield at an assumed marginal tax rate. The Tax-Equivalent Yield Calculator returns this figure from tax-equivalent yield = tax-exempt yield ÷ (1 − marginal tax rate). At that calculator’s documented worked-example inputs the tax-equivalent yield is 4.6%; holding every other input steady, moving marginal tax rate from 20.0% to 28.0% moves it from 4.4% to 4.9%, a spread of 0.486%.
A tax-exempt bond paying less than a taxable one can still leave more in your pocket. Tax-equivalent yield restates the exempt yield as the taxable yield that would match it, which is the only honest way to compare a municipal bond against a corporate one. The gap widens as the marginal rate rises. For a household in a low bracket, a taxable bond paying more usually wins outright. Higher up, the exempt bond can win while appearing to pay less, and the comparison is impossible to eyeball.
| Term | Tax-equivalent yield |
|---|---|
| Category | Taxes & Paycheck |
| How it is found | Tax-equivalent yield = tax-exempt yield ÷ (1 − marginal tax rate) |
| Worked example | Tax-equivalent yield: 4.6% |
| Computed by | Tax-Equivalent Yield Calculator |
| Related terms | 5 defined in this glossary |
Before you rely on it
What to check
Use your marginal rate, including state tax where the exemption applies.
The common error
Where people go wrong with tax-equivalent yield
Using an effective or average rate. That understates the exemption, sometimes by enough to reverse the ranking.
Worked through
Tax-equivalent yield in plain numbers
A municipal bond yields 3.2%, free of federal income tax. A taxable corporate bond of similar quality yields 4.5%. Which is better depends on your tax bracket; the tax-equivalent yield is the tax-free yield divided by one minus your marginal rate. At a 32% rate, 3.2% ÷ 0.68 is 4.71%, so the municipal beats the 4.5% corporate. At a 12% rate, 3.2% ÷ 0.88 is 3.64%, and the corporate wins, and the same bond is a good buy for one investor and a poor one for another. Add state tax and the comparison shifts again, since some municipal interest is also exempt from state tax for residents.
Easily confused
Tax-equivalent yield and its neighbours
Tax-equivalent yield is not the after-tax yield, though it is the same idea turned around. After-tax yield shrinks a taxable yield by your tax rate. Tax-equivalent yield grows a tax-free yield to what a taxable bond would need to pay to match it; both use your marginal rate; it also differs from yield to maturity, which measures a bond's return without reference to taxes. Municipal bonds can have their own risks and features, such as call provisions, alternative minimum tax exposure or taxable portions, that a single yield hides.
In real decisions
Where tax-equivalent yield turns up
Investors use it to compare municipal bonds and tax-exempt funds with taxable alternatives; advisors show clients where the break-even bracket lies; people in high-tax states check the state-adjusted version. Brokers quote it on bond listings. It is often the deciding factor for high-income investors seeking income. A calculator takes the tax-free yield and your marginal rate and returns the yield a taxable bond must offer.
Know the edges
Where tax-equivalent yield stops being reliable
It depends on the marginal rate you enter, which changes with income and law. Credit quality, maturity and liquidity differ across bonds, so equal yields do not mean equal safety. Rules on taxes for municipal interest vary and have exceptions. This is educational and not tax or investment advice. Confirm the details with the bond documents and a qualified professional.
Quick answers
What people ask about tax-equivalent yield
Do I include state tax? If the bond is exempt from state tax as well, use the combined marginal rate to see the full advantage. Rules vary by state and by where the issuer is located.
Are municipal bonds risk free? No. They carry credit, interest-rate and liquidity risks, and some are subject to other taxes. Check the issuer's finances and the bond's terms.
Why is TEY higher for high earners? Because their marginal tax rate is higher, so the exemption is worth more. The formula divides by one minus that rate.
Put it to work
How tax-equivalent yield is calculated
At the tax-equivalent yield calculator’s worked-example inputs, tax-equivalent yield is 4.6%, taxable-yield premium is 1.1%. Moving marginal tax rate from 20.0% to 28.0% moves that first figure from 4.4% to 4.9%.
Open the Tax-Equivalent Yield Calculator →
This simplified educational estimate is not tax advice or a tax-return calculation.
Related vocabulary
Terms used alongside this one
Keep reading
Nearby in the glossary
- ← Tax-deferred
- Term →
- All 174 defined termsThe complete Free Calculators Online financial glossary.