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:

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%).

www.sciencedirect.com [PDF]

… 10 Despite this issue, the smoothness of the NSS yield curve, its ease of economic interpretation, and its relative … data on zero-coupon yields (continuously compounded), instantaneous forward rates (continuously compounded) and par yields (coupon-equivalent), for the …

www.sciencedirect.com [PDF]

… 10 Despite this issue, the smoothness of the NSS yield curve, its ease of economic interpretation, and its relative … data on zero-coupon yields (continuously compounded), instantaneous forward rates (continuously compounded) and par yields (coupon-equivalent), for the …

www.sciencedirect.com [PDF]

… 10 Despite this issue, the smoothness of the NSS yield curve, its ease of economic interpretation, and its relative … data on zero-coupon yields (continuously compounded), instantaneous forward rates (continuously compounded) and par yields (coupon-equivalent), for the …

www.jstor.org [PDF]

… 10 Despite this issue, the smoothness of the NSS yield curve, its ease of economic interpretation, and its relative … data on zero-coupon yields (continuously compounded), instantaneous forward rates (continuously compounded) and par yields (coupon-equivalent), for the …

www.sciencedirect.com [PDF]

… 10 Despite this issue, the smoothness of the NSS yield curve, its ease of economic interpretation, and its relative … data on zero-coupon yields (continuously compounded), instantaneous forward rates (continuously compounded) and par yields (coupon-equivalent), for the …

onlinelibrary.wiley.com [PDF]

… 10 Despite this issue, the smoothness of the NSS yield curve, its ease of economic interpretation, and its relative … data on zero-coupon yields (continuously compounded), instantaneous forward rates (continuously compounded) and par yields (coupon-equivalent), for the …

www.nber.org [PDF]

… 10 Despite this issue, the smoothness of the NSS yield curve, its ease of economic interpretation, and its relative … data on zero-coupon yields (continuously compounded), instantaneous forward rates (continuously compounded) and par yields (coupon-equivalent), for the …

www.sciencedirect.com [PDF]

… 10 Despite this issue, the smoothness of the NSS yield curve, its ease of economic interpretation, and its relative … data on zero-coupon yields (continuously compounded), instantaneous forward rates (continuously compounded) and par yields (coupon-equivalent), for the …

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Divide the tax-exempt yield by 1 minus the investor's tax rate.

Yield equivalence is the interest rate on a taxable security that would render a return equivalent to that of a tax-exempt security, and vice versa.

You want to know what interest rate on your taxable investment will give you the same return as 6% tax exempt.

This author used an example with 6% and 2 rates of taxation because these are common numbers in practice.

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