What this tax-equivalent yield calculator does
This calculator finds your tax-equivalent yield. You enter a tax-free yield and your tax rate. The tool then grosses the yield up. So you see the taxable yield you would need to match. It puts both kinds on a level field. The result is shown as a percent.
What tax-equivalent yield is
Tax-equivalent yield is a fair comparison rate. A tax-free bond pays you with no tax due. A taxable bond is cut by your tax. So you cannot compare the two head-on. This figure shows the taxable rate that matches. It makes the choice an even one.
How it is calculated
The tool takes your tax-free yield. It divides it by one minus your tax rate. So a higher tax rate lifts the result. A higher tax-free yield lifts it too. The result is your tax-equivalent yield. The tool does the work for you.
What the result tells you
The result shows your tax-equivalent yield. A tax-free three point five at a thirty-two percent rate is about five point one five. A higher tax rate raises it. A higher tax-free yield raises it too. So it shows the taxable yield to beat. It is only an estimate.
The tax-free yield
Your tax-free yield is the rate on the tax-free bond. It is often a municipal bond yield. A higher tax-free yield lifts the result. So this number is the starting point. Use the quoted yield on the bond. It is the core of the whole sum. Enter your tax-free yield.
The tax rate
Your tax rate is your marginal tax rate. It is the rate on your top dollar of income. A higher tax rate lifts the result. So this number sets how much tax bites. Use your combined marginal rate. A higher bracket makes tax-free more valuable. Enter your tax rate.
Why it helps you compare
This rate solves a real comparison problem. Tax-free and taxable yields look different. You cannot judge them side by side. So this figure restates the tax-free one. Then you can compare it to a taxable bond. It shows which truly pays more after tax.
Why your bracket matters
Your tax bracket changes the answer a lot. A high earner saves more on tax-free income. So tax-free bonds suit high brackets best. A low bracket gains far less from them. The break-even yield rises with your rate. Always use your own marginal rate. This keeps the comparison honest.
How to use it
Enter your tax-free yield first. Add your marginal tax rate. Read the tax-equivalent yield as a percent. Then compare it to a taxable bond. See which one pays more. Compare a few rates. Use it to choose between bonds.
The limits of this calculator
This tool comes with limits. It uses one tax rate only. It ignores state and local taxes. It assumes the yield is fully tax-free. It does not weigh risk or fees. So treat the figure as a guide. So check the full tax picture.
A final tip
Use this to compare yields fairly. Remember to use your marginal rate. Add state tax effects if they apply. Weigh risk as well as yield. Compare the result to taxable bonds. Do not judge on yield alone. A careful choice needs the whole picture.