Tax-Equivalent Yield

Yield & Income
Updated Apr 2026 • Has calculator

The pre-tax yield a taxable bond must offer to match the after-tax return of a tax-exempt municipal bond.

What is Tax-Equivalent Yield?

Tax-equivalent yield (TEY) allows investors to compare the after-tax return of a tax-exempt municipal bond with a taxable bond on an equal footing. Because municipal bond interest is exempt from federal income tax (and often state tax for in-state bonds), a 3.5% muni yield can be worth more than a 5% taxable yield to an investor in the 35% bracket. The formula simply grosses up the muni yield by the investor's marginal tax rate. TEY is most valuable for high-income investors who benefit most from tax-exempt income, and it rises with the investor's tax bracket.

Formula

TEY = Muni Yield / (1 − Tax Rate)

Worked Example

Worked example — City of New York General Obligation Bond

Hypothetical investor in 37% federal bracket, 2024

Step 1  Municipal bond YTM: 3.50% (federal tax-exempt)
Step 2  Investor marginal tax rate: 37%
Step 3  TEY = 3.50% / (1 − 0.37)
Step 4  TEY = 3.50% / 0.63 = 5.56%
Step 5  → A taxable bond must yield > 5.56% to beat this muni after tax

Source: IRS — Publication 550: Investment Income and Expenses (2024-01-01)

Calculate Tax-Equivalent Yield

Tax-exempt municipal bond yield to maturity

Federal marginal income tax rate (e.g. 37 for top bracket)

Tax-Equivalent Yield

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Not investment advice.

How to Interpret Tax-Equivalent Yield

< 4
< 4%: Low TEY — muni attractive only vs. very low-rate taxable bonds
4 – 6
4–6%: Moderate — competitive with investment-grade corporate bond yields
6 – 8
6–8%: High — muni is attractive vs. most IG taxable alternatives
> 8
> 8%: Very high — top-bracket investor; strong muni tax advantage

📚 Tax Basics — Complete the path

  1. Federal Income Tax
  2. Capital Gains Tax
  3. After-Tax Return
  4. Tax-Equivalent Yield
  5. Real Return
Sources
  1. IRS — Publication 550: Investment Income and Expenses
  2. CFA Institute — Fixed Income Analysis, 3rd ed., Ch. 4
  3. Investopedia — Tax-Equivalent Yield