Series 50: Tax-Equivalent Yield

Tax-Equivalent Yield

For comparing the relative benefits of taxable versus tax-free bonds, a useful measure is tax-equivalent yield. Tax-equivalent yield is the pre-tax yield that a taxable corporate bond must offer to be equivalent to the tax-free yield of a municipal bond. Its formula is simple. You must memorize this formula for the exam.

Investors can use tax-equivalent yield to compare their “pre-tax” yield of a corporate bond.

Example Question

A general obligation bond is issued at an interest rate of 4%. Cindy has a $60