How do I calculate a municipal bond's taxable-equivalent yield?

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AcadiFi · Accepted Answer

Taxable-Equivalent Yield (TEY) = Tax-free yield / (1 - marginal tax rate). For a federal-tax-exempt municipal: TEY = 3.4% / (1 - 0.35) = 5.23%. This means a taxable corporate bond needs to yield at least 5.23% to match your 3.4% muni after taxes. If the muni is ALSO exempt from your state income tax (a so-called 'double tax-exempt' bond held by an in-state resident), use combined federal + state rate: if state tax is 7% and federal-state combination applies (with state deductibility), effective rate ≈ 35% + 7% × (1-0.35) = 39.55%. TEY = 3.4% / (1 - 0.3955) = 5.62%. Example: Jalen Rodriguez is a California resident at 35% federal + 9.3% CA marginal. He's comparing a California general obligation bond yielding 3.4% (triple tax-exempt for him — federal, state, and not subject to AMT) vs a similar-maturity corporate yielding 5.1%. Combined rate ≈ 35% + 9.3%×0.65 = 41.05%. TEY = 3.4/(1-0.4105) = 5.77%. The muni wins on an after-tax basis (5.77% > 5.1%). Caveats: (1) watch for AMT on private activity bonds; (2) factor credit quality differences; (3) state-tax TEY math only holds for in-state bonds.

How do I calculate a municipal bond's taxable-equivalent yield?

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