Are you tired of not knowing what your taxable equivalent yield is? Fear not! We’ve got you covered. Our calculator will help you understand this complicated concept without needing a PhD in finance.
Taxable Equivalent Yield Formula
The taxable equivalent yield formula is as follows:
TEY = Tax-Free Yield / (1 - Marginal Tax Rate)
Categories / Types / Range / Levels of TEY Calculations
| Category |
Range |
TEY Interpretation |
| Low |
0% – 2% |
Not worth investing |
| Moderate |
2% – 4% |
May be worth investing |
| High |
4% – 6% |
Worth investing |
| Very High |
6% + |
Great investment opportunity |
Examples of TEY Calculations
| Individual |
Tax-Free Yield |
Marginal Tax Rate |
TEY |
| Jane |
3.5% |
25% |
4.67% |
| John |
2.25% |
32% |
3.31% |
| Bob |
4.75% |
18% |
5.79% |
Different Ways to Calculate TEY
| Method |
Advantages |
Disadvantages |
Accuracy Level |
| Simplified Formula |
Easy to use |
Not precise |
Low |
| Long Formula |
Accurate |
Complex |
High |
| Excel Functions |
Flexible |
Time-consuming |
Medium |
Evolution of TEY Calculation
| Time Period |
TEY Calculation |
| Pre-1986 |
No standardized calculation |
| 1986 |
Introduction of standardized tax rates |
| 2001 |
Changes in tax rates and brackets |
Limitations of TEY Calculation Accuracy
- Interest rate changes can affect the accuracy of TEY calculation.
- Tax law changes can also impact the accuracy of TEY calculation.
- Differences in state tax rates can make the TEY calculation inaccurate.
Alternative Methods for Measuring TEY Calculation
| Method |
Pros |
Cons |
| Taxable Yield |
Easy to calculate |
Doesn’t account for tax rate |
| Taxable Bond Equivalent Yield |
Accounts for tax rate |
Only applies to bonds |
| Tax-Adjusted Yield |
Accurate |
Complex formula |
FAQs on TEY Calculations
- What is taxable equivalent yield? Taxable equivalent yield is the yield on a taxable investment that would make it equal to the yield on a tax-free investment.
- How do you calculate taxable equivalent yield? You can calculate taxable equivalent yield by dividing the tax-free yield by 1 minus the marginal tax rate.
- What is the formula for taxable equivalent yield? The formula is TEY = Tax-Free Yield / (1 – Marginal Tax Rate).
- Why is taxable equivalent yield important? It helps investors compare the yields of taxable and tax-free investments.
- What is the difference between yield and taxable equivalent yield? Yield is the total return on an investment, while taxable equivalent yield accounts for taxes.
- What is a good taxable equivalent yield? A good taxable equivalent yield depends on an individual’s tax bracket and investment goals.
- Can taxable equivalent yield be negative? Yes, if the tax-free yield is lower than the tax rate.
- What does a high taxable equivalent yield mean? A high taxable equivalent yield means that the investment is more attractive because it provides a higher return after taxes.
- Is taxable equivalent yield the same as after-tax yield? No, taxable equivalent yield is the yield on a taxable investment that would make it equal to the yield on a tax-free investment, while after-tax yield is the yield on a taxable investment after taxes have been paid.
- What is the difference between tax-free and tax-exempt? Tax-free means that the investment is not subject to federal or state taxes, while tax-exempt means that the investment is exempt from federal or state taxes.
Resources for Further Research
- Internal Revenue Service (IRS) – Provides information on tax laws and regulations related to investments. Visit: https://www.irs.gov/
- Investopedia – Offers articles and tutorials on finance and investing topics. Visit: https://www.investopedia.com/
- The Balance – Provides financial advice and resources for investors. Visit: https://www.thebalance.com/
