Fidelity Taxable Equivalent Yield Calculator

TEY Formula:

\[ TEY = \frac{Municipal\ Yield}{1 - Federal\ Tax\ Rate - State\ Tax\ Rate + (Federal\ Tax\ Rate \times State\ Tax\ Rate)} \]

Taxable Equivalent Yield (TEY):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is Taxable Equivalent Yield?

Taxable Equivalent Yield (TEY) is a calculation that allows investors to compare the yield of a tax-free municipal bond to that of a taxable bond. It shows what yield you would need to earn on a taxable investment to equal the after-tax return of a tax-free municipal bond.

2. How Does the Calculator Work?

The calculator uses the TEY formula:

\[ TEY = \frac{Municipal\ Yield}{1 - Federal\ Tax\ Rate - State\ Tax\ Rate + (Federal\ Tax\ Rate \times State\ Tax\ Rate)} \]

Where:

Municipal Yield — The yield of the tax-free municipal bond (%)
Federal Tax Rate — Your federal income tax rate (decimal)
State Tax Rate — Your state income tax rate (decimal)

Explanation: The formula accounts for the combined effect of federal and state taxes to determine the equivalent taxable yield needed to match the municipal bond's after-tax return.

3. Importance of TEY Calculation

Details: Calculating TEY helps investors make informed decisions when comparing taxable and tax-free investments. It's particularly important for high-income investors in higher tax brackets who may benefit more from tax-free municipal bonds.

4. Using the Calculator

Tips: Enter the municipal bond yield as a percentage (e.g., 3.5 for 3.5%). Enter federal and state tax rates as decimals (e.g., 0.24 for 24%). All values must be valid (yield ≥ 0, tax rates between 0-1).

5. Frequently Asked Questions (FAQ)

Q1: Why is TEY important for bond investors?
A: TEY allows investors to compare tax-free municipal bonds with taxable bonds on an equal basis, helping determine which investment provides better after-tax returns.

Q2: How do I determine my tax rates?
A: Use your marginal tax brackets for both federal and state taxes. These can typically be found on IRS and state tax websites or from your tax preparer.

Q3: Are municipal bonds always tax-free?
A: Most municipal bonds are exempt from federal taxes, and often from state taxes if you reside in the issuing state. However, some may be subject to alternative minimum tax (AMT).

Q4: Does this calculation work for all tax situations?
A: This is a general calculation. Complex tax situations involving local taxes, AMT, or other factors may require more detailed analysis.

Q5: Should I always choose the investment with the higher TEY?
A: While TEY is an important factor, also consider credit risk, duration, liquidity, and your overall investment objectives before making decisions.