How to Calculate Your Federal Taxable Equivalent Yield

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How to Calculate Your Federal Taxable Equivalent Yield

If you want to figure your taxable equivalent yield when only federal taxes are involved, use this formula:

Here is how it works. Imagine you pay federal taxes at the 24 percent marginal rate. Now suppose that you are considering buying a municipal bond that earns 6 percent interest. To calculate how much you would need to earn on a taxable bond to equal your 6 percent after-tax rate, enter the numbers:

You would have to earn 7.9 percent on a taxable bond to equal your 6 percent municipal bond.