The formula to calculate the Tax Equivalent Yield (TEQY) is:
\[ TEQY = \frac{\text{TFY}}{1 - \text{TR}} \]
Where:
Tax Equivalent Yield is the pretax yield that a taxable bond needs to possess for its yield to be equal to that of a tax-free municipal bond.
Tax Free Yield is the income return on an investment, such as the interest or dividends received from holding particular security without any tax imposed.
Tax Rate is the ratio (usually expressed as a percentage) at which a business or person is taxed.
Let's assume the following values:
Using the formula:
\[ TEQY = \frac{\text{TFY}}{1 - \text{TR}} \]
Evaluating:
\[ TEQY = \frac{2.5}{1 - 0.5} \]
The Tax Equivalent Yield is 5.
| Tax Free Yield | Tax Rate (%) | Tax Equivalent Yield |
|---|---|---|
| 2 | 50 | 4.00000000000000 |
| 2.5 | 50 | 5.00000000000000 |
| 3 | 50 | 6.00000000000000 |
| 3.5 | 50 | 7.00000000000000 |
| 4 | 50 | 8.00000000000000 |
| 4.5 | 50 | 9.00000000000000 |
| 5 | 50 | 10.00000000000000 |
| 5.5 | 50 | 11.00000000000000 |
| 6 | 50 | 12.00000000000000 |
| 6.5 | 50 | 13.00000000000000 |
| 7 | 50 | 14.00000000000000 |
| 7.5 | 50 | 15.00000000000000 |
| 8 | 50 | 16.00000000000000 |
| 8.5 | 50 | 17.00000000000000 |
| 9 | 50 | 18.00000000000000 |
| 9.5 | 50 | 19.00000000000000 |
| 10 | 50 | 20.00000000000000 |