Taxable equivalent yield
Certified Financial Planner glossary · Certified Financial Planner
Definition
The pre-tax yield a taxable instrument must offer to match a given tax-exempt yield.
Taxable equivalent yield in plain English
A client compares a 4% municipal bond to a 5.5% corporate bond and needs an apples-to-apples pre-tax figure. Taxable equivalent yield is the pre-tax yield a taxable instrument must offer to match a given tax-exempt yield, usually tax-exempt yield divided by one minus the marginal tax rate. Bracket assumptions drive the result. Using the wrong marginal rate, or ignoring state tax when the stem makes it material, flips the comparison. Always ask which tax rate the stem wants you to use before declaring a winner.
Practice Taxable equivalent yield
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