If something is paying X% (fully taxable) and your tax rate is Y%, then the equivalent tax-free yield would be T is:
T = X*(1-Y)
Or the other way around, if something is paying T% tax free yield and your tax rate is Y%, then the equivalent fully taxable yield X is:
X = T / (1-Y)
If a regular bond pays 5% and a muni bond pays 3% and your tax rate is 35%:
5% * (1-.35) = 3.25% -- the 5% wins as its equivalent tax-free yield is 3.25%.
Going the other way: 3% / (1-.35) ~= 4.62% -- the 5% wins as the fully taxable equivalent yield on the muni bond is 4.62%.
T = X*(1-Y)
Or the other way around, if something is paying T% tax free yield and your tax rate is Y%, then the equivalent fully taxable yield X is:
X = T / (1-Y)
If a regular bond pays 5% and a muni bond pays 3% and your tax rate is 35%:
5% * (1-.35) = 3.25% -- the 5% wins as its equivalent tax-free yield is 3.25%.
Going the other way: 3% / (1-.35) ~= 4.62% -- the 5% wins as the fully taxable equivalent yield on the muni bond is 4.62%.
Statistics: Posted by Morik — Fri Apr 19, 2024 2:07 am — Replies 2 — Views 193