Interest on most U.S. municipal bonds is exempt from federal tax, and from state tax for in-state bonds. The higher your tax bracket, the more a muni’s yield is worth.
How to use the Tax Equivalent Yield Calculator
- Tax-free bond yield
- Federal marginal tax rate
- State tax rate (if also exempt)
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the tax-free yield, your federal marginal tax rate and state tax rate (if the bond is also state tax-exempt).
Tips
- Check whether rates are quoted annually, semi-annually or per period.
- Bond prices and yields move in opposite directions – a higher yield means a lower price.
- Use the bond’s clean price (without accrued interest) for yield calculations.
- Credit ratios are most useful when tracked over several years.
Common mistakes to avoid
- Confusing the coupon rate with the yield.
- Using the face value instead of the market price.
- Forgetting that callable bonds may be redeemed before maturity.
Inputs explained
| Field | What to enter |
|---|---|
| Tax-free bond yield | In % |
| Federal marginal tax rate | In % |
| State tax rate (if also exempt) | In % |
What each result means
- Combined tax rate = [Federal marginal tax rate] + [State tax rate (if also exempt)] – [Federal marginal tax rate]×[State tax rate (if also exempt)]÷100
- Tax-equivalent yield = [Tax-free bond yield]÷(1 – [Combined tax rate]÷100)
- Tax-equivalent yield (federal tax only) = [Tax-free bond yield]÷(1 – [Federal marginal tax rate]÷100)
Example values
How the main result changes when Tax-free bond yield changes and everything else stays at the example values above:
| Tax-free bond yield (%) | Tax-equivalent yield (%) |
|---|---|
| 1.75 | 2.71 |
| 2.63 | 4.06 |
| 3.5 | 5.42 |
| 4.38 | 6.77 |
| 5.25 | 8.13 |
| 7 | 10.84 |
Formula
Tax-equivalent yield = tax-free yield ÷ (1 − tax rate)Combined rate = federal + state × (1 − federal) if state tax is deductible, otherwise federal + stateWorked example
Inputs — Tax-free bond yield: 3.5 %; Federal marginal tax rate: 32 %; State tax rate (if also exempt): 5 %.
Results — Combined tax rate = 35.4 %; Tax-equivalent yield = 5.42 %; Tax-equivalent yield (federal tax only) = 5.15 %.
Frequently asked questions
What is the tax-equivalent yield?
The taxable yield that matches a tax-free yield after tax.
Are municipal bonds always tax-free?
Federal tax-free in most cases; state-exempt usually only for in-state bonds.
Who benefits most from munis?
Investors in high tax brackets.
What formula does the Tax Equivalent Yield Calculator use?
Tax-equivalent yield = tax-free yield ÷ (1 − tax rate).