Glossary of Municipal Securities Terms

TAXABLE EQUIVALENT YIELD

The interest rate that must be received on a taxable security to provide the bondholder the same after-tax return as that earned on a tax-exempt bond. Because interest earned on municipal securities generally is not subject to federal income taxation, a tax-exempt bond does not have to yield to a bondholder as much as a taxable security to produce an equivalent after-tax yield; this differential is attributable to the effect of the tax liability incurred by the bondholder if it held a taxable security. The taxable equivalent yield varies according to the bondholder’s marginal federal income tax bracket and, where applicable, any state or local tax liability as well. The formula for determining the taxable equivalent yield is:

Taxable Equivalent Yield  =            Tax-Exempt Yield         
                                          100% – Marginal Tax Bracket

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