Yield Equivalence

Yield Equivalence

What is ‘Yield Equivalence’

The interest rate on a taxable security that would render a return equivalent to that of a tax-exempt security, and vice versa, calculated as follows:

Explaining ‘Yield Equivalence’

In order to calculate yield equivalence, divide the tax-exempt yield by 1 minus the investor’s tax rate. For example, say you were considering a 6% tax-exempt municipal bond, but you would like to calculate what the interest rate on a taxable investment would have to be to give you the same return. If you have a 20% rate of taxation, you would need a return of 7.5% on your taxable investment to match the 6% return on the tax-exempt investment (6%/(1-0.20)=7.5%).

Further Reading