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Tax-Equivalent Yield
It is the yield on a taxable bond that should compete the yield generated by non-taxable municipal bond.
It is also called “After Tax Yield” or “Yield Equivalence.”
Tax Equivalent Yield is calculated by dividing Tax Free Municipal Bond Yield with (1- Tax Rate).
If a Tax Rate is 10% and Tax Free Municipal Bond Yield is 15%, than:
15 / (1-0,10) = 16.66
Yield on a taxable bond should be 16.66% in order to match 15% yield on non-taxable municipal bond.
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