How do you calculate the after tax yield of a bond?
The effective after-tax yield can be found by multiplying the percentage of yield after taxes by the pre-tax rate of return. If the investment in this example returns 8 percent, that number would be multiplied by 0.70 to get an after-tax yield of 5.6 percent.
What is the return on tax free municipal bonds?
High-yield municipal bond returns are up around 1.5% year to date and have generally outperformed many other fixed-income asset classes such as investment-grade corporate bonds which have gone down 5.3% year to date.
How do I calculate after tax yield?
The after-tax yield on a Treasury is obtained by multiplying its yield by 1 minus your federal tax rate. The after-tax yield on a fully taxable bond depends on whether you take that state income tax deduction. If you do not take the deduction, multiply the yield by 1 minus your federal rate minus your state rate.
How do you calculate after tax equivalent yield?
Calculating Tax Equivalent Yield
- Find the reciprocal of your tax rate (1 – your tax rate). If you pay 25% tax, your reciprocal would be (1 – . 25) = . 75, or 75%.
- Divide this amount into the yield on the tax-free bond to find out the TEY. For example, if the bond in question yields 3%, use (3.0 / . 75) = 4%.
Why are muni bonds tax-exempt?
Bonds used to fund local and state government projects like buildings and highways are afforded tax-exempt status at the federal level. These tax advantages are offset by lower interest yields. Municipal bonds typically have lower coupon rates than similarly rated corporate issues with comparable maturities.
What is yield on municipal bonds?
The yield on muni bonds typically is about 80% of that of U.S. Treasury bonds, reflecting the fact that interest on the former is exempt from federal income taxes and interest on the latter is taxable.
What is the formula for taxable equivalent yield?
The formula for a bond’s tax-equivalent yield includes three variables: R(te) = the tax-equivalent yield for a given investor. R(tf) = the tax-free investment’s yield. t = the investor’s current marginal tax rate. Given these variables, the formula for an investment’s tax-equivalent yield is: R(te) = R(tf) / (1 – t)
What is equivalent taxable yield?
The equivalent taxable yield is the yield which would need to be returned from an investment with taxable interest in order to be equivalent to an investment with tax-free interest.
What is tax exempt yield?
A tax-exempt security is an investment in which the income produced is free from federal, state, and/or local taxes. Yield equivalence is the interest rate on a taxable security that would produce a return that is equal to that of a tax-exempt security, and vice versa.
What is my tax-equivalent yield?
The tax-equivalent yield is the pretax yield that a taxable bond needs to possess for its yield to be equal to that of a tax-free municipal bond . This calculation can be used to fairly compare the yield of a tax-free bond to that of a taxable bond to see which bond has a higher applicable yield. It is also known as the after-tax yield. Nov 18 2019