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Tax Exempt Yield Calculator Online

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The Tax Exempt Yield Calculator is a financial tool designed to help investors compare the yields of tax-exempt securities with those of taxable investments. By inputting the tax-exempt yield and your marginal tax rate, the calculator computes the tax-equivalent yield (TEY). This allows investors to understand how much a taxable investment would need to yield to match the after-tax return of a tax-exempt investment. This comparison is crucial for making informed investment decisions and maximizing returns.

Formula of Tax Exempt Yield Calculator

The formula to calculate the tax-equivalent yield (TEY) of a tax-exempt investment, like a municipal bond, is:

Tax Exempt Yield

Here’s what each part of the formula means:

  • TEY: This is the tax-equivalent yield. Which represents the yield a taxable investment would need to generate to provide the same after-tax return as the tax-exempt investment.
  • Tax-exempt yield: This is the annual interest rate offered by the tax-exempt security.
  • Marginal tax rate: This is your federal income tax bracket expressed as a decimal. For example, if you are in the 25% tax bracket, your marginal tax rate would be 0.25.
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Understanding and applying this formula helps investors make better financial decisions by accurately comparing tax-exempt and taxable investment yields.

Table for General Terms

To make it easier for you. Here is a table of pre-calculated tax-equivalent yields for various marginal tax rates and tax-exempt yields:

Tax-Exempt Yield (%)10% Tax Rate22% Tax Rate24% Tax Rate32% Tax Rate37% Tax Rate
2.02.222.562.632.943.17
3.03.333.853.954.414.76
4.04.445.135.265.886.35
5.05.566.416.587.357.94

Example of Tax Exempt Yield Calculator

Let’s consider an example to illustrate how the Tax Exempt Yield Calculator works. Suppose you are in the 32% federal income tax bracket and you are considering investing in a municipal bond that offers a tax-exempt yield of 4%.

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Using the formula:

TEY = 4% / (1 – 0.32) TEY = 4% / 0.68 TEY ≈ 5.88%

This means that a taxable investment would need to yield approximately 5.88% to provide the same after-tax return as the 4% tax-exempt yield from the municipal bond. This calculation helps you compare different investment options and choose the one that maximizes your returns after taxes.

Most Common FAQs

How do I use the Tax Exempt Yield Calculator?

To use the Tax Exempt Yield Calculator, you need to input the tax-exempt yield of the investment and your marginal tax rate. The calculator will then compute the tax-equivalent yield, allowing you to compare it with the yields of taxable investments.

Why is the tax-equivalent yield important for investors?

The tax-equivalent yield is important because it helps investors make informed decisions by comparing the true value of tax-exempt and taxable investments. This ensures that they can maximize their after-tax returns and choose the best investment options.

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