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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

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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