Yield Equivalence

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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%).

The US Treasury yield curve: 1961 to the present
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 …

Financial opening, deposit insurance, and risk in a model of banking competition
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 …

Forecasting the term structure of government bond yields
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 …

The cost of capital, corporation finance and the theory of investment
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 …

Money in the utility function: functional equivalence to a shopping-time model
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 …

What drives provincial‐Canada yield spreads?
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 …

Reverse engineering the yield curve
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 …

Why Gaussian macro-finance term structure models are (nearly) unconstrained factor-VARs
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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Q&A About Yield Equivalence

How do you calculate yield equivalence?

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

What is yield equivalence?

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.

What does it mean to say "you would like to calculate what the interest rate on a taxable investment would have to be to give you the same return"?

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

Why did this author use an example with 6% and 2 rates of taxation?

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

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