EDUCBA

EDUCBA

MENUMENU
  • Free Tutorials
  • Free Courses
  • Certification Courses
  • 250+ Courses All in One Bundle
  • Login
Home Finance Finance Resources Finance Formula Tax Equivalent Yield Formula
Secondary Sidebar
Finance Blog
  • Finance Formula
    • Skewness Formula
    • Fixed Asset Turnover Ratio Formula
    • Forecasting Formula
    • EBITDA Margin Formula
    • Accounting Ratio Formula
    • Deferred Annuity Formula
    • Capital Investment Formula
    • Ratio Analysis Formula
    • Loss Ratio Formula
    • Benefit-Cost Ratio Formula
    • Probability Distribution Formula
    • Cash Conversion Cycle Formula
    • Accrued Income
    • DCF Excel summary
    • Price to Earning Ratio Formula
    • Current Yield of Bond Formula
    • Earnings Per Share Formula
    • Manufacturing Overhead Formula
    • FCFF Formula
    • Predetermined Overhead Rate Formula
    • Times Interest Earned Ratio Formula
    • Bank Efficiency Ratio Formula
    • Capital Expenditure Formula
    • Expense Ratio Formula
    • WACC Formula
    • Activity Ratio Formula
    • Standard Error Formula
    • Forward Rate Formula
    • Gearing Formula
    • Prime Cost Formula
    • Productivity Formula
    • t-Test Formula
    • Risk Free Rate Formula
    • Tax Shield Formula
    • Sortino Ratio
    • Reserve Ratio Formula
    • Bond Formula
    • Annualized Rate of Return Formula
    • Conditional Probability Formula
    • Financing Formula
    • Future Value of an Annuity Formula
    • For Profit vs Non Profit
    • Deadweight Loss Formula
    • Inflation Formula
    • Amortized Loan Formula
    • Horizontal Analysis Formula
    • Marginal Utility Formula
    • Kurtosis Formula
    • Macaulay Duration Formula
    • Multiplier Formula
    • Modified Duration Formula
    • Operating Leverage Formula
    • Payout Ratio Formula
    • Statistics Formula
    • Sampling Error Formula
    • Trend Analysis Formula
    • Taylor Rule Formula
    • Put Call Parity Formula
    • Annual Return Formula
    • Discount Rate Formula
    • Cash Flow Formula
    • Dilution Formula
    • Attrition Formula
    • Operating Expense Formula
    • Interpolation Formula
    • Annuity Due Formula
    • Bond Yield Formula
    • Turnover Ratio Formula
    • Efficiency Formula
    • Revenue Per Employee
    • Regression Line Formula
    • Yield to Maturity
    • Pearson Correlation Coefficient Formula
    • Accounting Formula
    • Fiscal Deficit Formula
    • Tax Multiplier Formula
    • Efficiency Ratio Formula
    • Demand Elasticity Formula
    • Gross Margin Formula
    • Elasticity Formula
    • Marginal Benefit Formula
    • Depreciation Formula
    • Cost-Benefit Analysis Formula
    • Percentage Change Formula
    • Levered Beta Formula
    • Shares Outstanding Formula
    • Capital Gain Formula
    • Convexity Formula
    • Gross Income Formula
    • Net Exports Formula
    • Producer Surplus Formula
    • Accounting Rate of Return Formula
    • Net Cash Flow Formula
    • Labor Force Participation Rate Formula
    • Moving Average Formula
    • Net Worth Formula
    • Accounting Profit Formula
    • Disposable Income Formula
    • Discount Formula
    • Average Variable Cost Formula
    • Total Variable Cost Formula
    • Product Cost Formula
    • Marginal Product Formula
    • Break-Even Sales Formula
    • Return on Sales Formula
    • Cost of Goods Manufactured Formula
    • Average Fixed Cost Formula
    • Stock Turnover Ratio Formula
    • Operating Ratio Formula
    • Equity Ratio Formula
    • Net Present Value Formula
    • Aggregate Demand Formula
    • Volatility Formula
    • Marginal Product of Labor Formula
    • Z Test Statistics Formula
    • Standard Cost Formula
    • Velocity of Money Formula
    • Invested Capital Formula
    • Unlevered Beta Formula
    • Bank Reconciliation Formula
    • Portfolio Return Formula
    • Central Tendency Formula
    • Accumulated Depreciation Formula
    • Intrinsic Value Formula
    • Decile Formula
    • Vector Cross Product Formula
    • Effective Annual Rate Formula
    • CAGR Formula
    • Mode Formula
    • Arithmetic Mean Formula
    • Real GDP Formula
    • Gini Coefficient Formula
    • Expected Value Formula
    • Price Elasticity of Supply Formula
    • Net Operating Income Formula
    • Profit Percentage Formula
    • GDP Per Capita Formula
    • Altman Z Score
    • Quartile Deviation Formula
    • Return on Capital Employed Formula
    • Consumer Price Index Formula
    • Economic Profit Formula
    • Market Share Formula
    • Real Interest Rate Formula
    • Income Elasticity of Demand Formula
    • Income From Operations Formula
    • Indexation Formula
    • Sales Formula
    • Money Multiplier Formula
    • GDP Deflator Formula
    • Residual Income Formula
    • Effective Interest Rate Formula
    • Coupon Bond Formula
    • Current Account Formula
    • Total Cost Formula
    • Total Expense Ratio Formula
    • Net Sales Formula
    • Percentage Decrease Formula
    • Uncertainty Formula
    • Nominal GDP Formula
    • Effect Size Formula
    • Delta Formula
    • Cost of Sales Formula
    • Fixed Cost Formula
    • Unemployment Rate Formula
    • Present Value of Annuity Formula
    • Compounding Formula
    • Geometric Distribution Formula
    • National Income Formula
    • Accounts Receivables Turnover Formula
    • Integer Formula
    • Ending Inventory Formula
    • Owner's Equity Formula
    • Capacity Utilization Rate Formula
    • Interest Formula
    • Nominal Interest Rate Formula
    • Risk Premium Formula
    • Interest Coverage Ratio Formula
    • Gross Profit Margin Formula
    • Diluted EPS Formula
    • Return On Average Equity Formula
    • Return on Average Assets Formula
    • Working Capital Formula
    • Revenue Per Employee Ratio Formula
    • Capital Employed Formula
    • Rule of 72 Formula
    • Inventory Turnover Ratio Formula
    • Preferred Dividend Formula
    • Retention Ratio Formula
    • Present Value Factor Formula
    • Equity Multiplier Formula
    • Continuous Compounding Formula
    • Return on Assets (ROA) Formula
    • Portfolio Variance Formula
    • Weighted Average Formula
    • Net Working Capital Formula
    • Tax Equivalent Yield Formula
    • Poisson Distribution Formula
    • Current Ratio Formula
    • Debt Ratio Formula
    • Quick Ratio Formula
    • Payback Period Formula
    • Marginal Cost Formula
    • Debt to Income Ratio Formula
    • Book Value Per Share Formula
    • Asset Turnover Ratio Formula
    • Perpetuity Formula
    • Bid-Ask Spread Formula
    • Price to Book Value Formula
    • Capital Gains Yield Formula
    • Net Profit Margin Formula
    • DuPont Formula
    • Bond Pricing Formula
    • Binomial Distribution Formula
    • Sustainable Growth Rate Formula
    • Average Collection Period Formula
    • Net Income Formula
    • CAPM Formula
    • Cost of Goods Sold Formula
    • Economic Order Quantity (EOQ) Formula
    • Amortization Formula
    • Enterprise Value Formula
    • Beta Formula
    • Cost of Equity Formula
    • Rate of Return Formula
    • Revenue Formula
    • Markup Price Formula
    • Cash Flow from Operations Formula
    • Simple Interest Rate Formula
    • Consumer Surplus Formula
    • Asset to Sales Ratio Formula
    • Debt Service Coverage Ratio Formula
    • Capitalization Rate Formula
    • Cost of Debt Formula
    • Straight Line Depreciation Formula
    • Variable Costing Formula
    • Return on Invested Capital Formula
    • Profitability Index Formula
    • Expected Return Formula
    • Cost of Capital Formula
    • Price Index Formula
    • Average Total Cost Formula
    • Discount Factor Formula
    • Price Elasticity Formula
    • Profitability Ratios Formula
    • Financial Leverage Formula
    • Contribution Margin Formula
    • Time Value of Money Formula
    • Balance Sheet Formula
    • Opportunity Cost Formula
    • Current Assets Formula
    • Operating Cycle Formula
    • Operating Margin Formula
    • Bond Equivalent Yield Formula
    • Marginal Revenue Formula
    • Sales Revenue Formula
    • Net Debt Formula
    • Times Interest Earned Formula
    • Gordon Growth Model Formula
    • Required Rate of Return Formula
    • Break Even Analysis Formula
    • Inventory Formula
    • Marginal Propensity to Consume Formula
    • Debt to Asset Ratio Formula
    • Solvency Ratio Formula
    • Interest Expense Formula
    • Leverage Ratio Formula
    • Dividend Payout Ratio Formula
    • Operating Profit Margin Formula
    • PEG Ratio Formula
    • Net Interest Margin Formula
    • Return on Equity (ROE) Formula
    • Overhead Ratio Formula
    • Future Value Formula
    • Days in Inventory Formula
    • Market Capitalization Formula
    • Sharpe Ratio Formula
    • Cash Ratio Formula
    • Retained Earnings Formula
    • Average Rate of Return Formula
    • Current Liabilities Formula
    • Equity Value Formula
    • Relative Risk Reduction Formula
    • Capital Adequacy Ratio Formula
    • Debtor Days Formula
    • DPMO Formula
    • Average Formula
    • Exponential Growth Formula
    • Net Realizable Value Formula
    • Range Formula
    • Shareholders' Equity Formula
    • Sinking Fund Formula
    • Doubling Time Formula
    • Salvage Value Formula
    • Coupon Rate Formula
    • Simple Interest Formula
    • Correlation Formula
    • R - Squared Formula
    • MTBF Formula
    • Change in Net Working Capital Formula
    • Midrange Formula
    • Normal Distribution Formula
    • Mean Formula
    • Population Mean Formula
    • Median Formula
    • Central Limit Theorem Formula
    • Free Cash Flow Formula
    • Stockholder's Equity Formula
    • Acid-Test Ratio Formula
    • Percentile Rank Formula
    • Purchasing Power Parity Formula
    • Harmonic Mean Formula
    • Relative Standard Deviation Formula
    • T Distribution Formula
    • Normalization Formula
    • Operating Income Formula
    • Markup Percentage Formula
    • Relative Change Formula
    • Maturity Value Formula
    • Salary Formula
    • High Low Method
    • Income Statement Formula
    • Market to Book Ratio Formula
    • Dividends Per Share Formula
    • Daily Compound Interest Formula
    • Working Capital Turnover Ratio Formula
    • Weighted Mean Formula
    • Compounded Annual Growth Rate Formula
    • Regression Formula
    • Margin of Error Formula
    • Hypergeometric Distribution Formula
    • Standard Normal Distribution Formula
    • NOPAT Formula
    • Effective Tax Rate Formula
    • Degree of Operating Leverage Formula
    • Outliers Formula
    • Information Ratio Formula
    • Percent Error Formula
    • Hypothesis Testing Formula
    • Activity Based Costing Formula
    • Coverage Ratio Formula
    • Market Risk Premium Formula
    • Degree of Financial Leverage Formula
    • Absorption Costing Formula
    • Future Value of Annuity Due Formula
    • Internal Growth Rate Formula
    • F-Test Formula
    • Covariance Formula
    • Population Variance Formula
    • Coefficient of Determination Formula
    • Adjusted R Squared Formula
    • Compound Interest Formula
    • Gross Profit Formula
    • Accounting Equation Formula
    • Sample Size Formula
    • Sample Standard Deviation Formula
    • Quartile Formula
    • Variance Analysis Formula
    • Correlation Coefficient Formula
    • Z Score Formula
    • Variance Formula
    • Present Value Formula
    • Coefficient of Variation Formula
    • Net Asset Value Formula
    • Profit Margin Formula
    • Holding Period Return Formula
    • Capital Asset Pricing Model Formula
    • Present Value of Annuity Due Formula
    • Depreciation Expenses Formula
    • Annuity Formula
    • Taxable Income Formula
    • Profit Formula
    • Monthly Compound Interest Formula
    • Equity Formula
    • Return on Total Assets Formula
    • Alpha Formula
    • Debt to Equity Ratio Formula
    • EBITDA Formula
    • Accrued Interest Formula
    • Dividend Formula
    • Common Stock Formula
    • Mortgage Formula
    • Growth Rate Formula
    • Absolute Value Formula
  • Accounting fundamentals (700+)
  • Asset Management Tutorial (200+)
  • Banking (44+)
  • Corporate Finance Basics (373+)
  • Credit Research Fundamentals (6+)
  • Economics (88+)
  • Financial Modeling in Excel (17+)
  • Investment Banking Basics (140+)
  • Investment Banking Careers (29+)
  • Trading for dummies (69+)
  • valuation basics (27+)
  • Insurance Resources (14+)
  • Top Finance Books (7+)
Finance Blog Courses
  • Investment Banking Course
  • Investment Banking Online Course
  • Financial Modeling Certification

Tax Equivalent Yield Formula

By Madhuri ThakurMadhuri Thakur

Tax-Equivalent-Yield-Formula

Tax Equivalent Yield Formula (Table of Contents)

  • Tax Equivalent Yield Formula
  • Tax Equivalent Yield Calculator
  • Tax Equivalent Yield Formula in Excel (With Excel Template)

Tax Equivalent Yield Formula

The minimum pretax yield a particular bond should possess so that it makes equal to the return on tax-exempt investment. Taxable equivalent it is vastly used during the calculation of bond yield.

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

All in One Financial Analyst Bundle(250+ Courses, 40+ Projects)
Financial ModelingInvestment BankingUS GAAPCFA-Level 1 & 2
Equity ResearchM & A ModelingPrivate Equity ModelingForex Trading
Price
View Courses
250+ Online Courses | 40+ Projects | 1000+ Hours | Verifiable Certificates | Lifetime Access
4.9 (85,982 ratings)

This calculation is extensively used for comparing the field of tax free Bond with a taxable Bond to see which of them has a higher yield. This calculation is also called after tax yield.

This yield return is calculated before investing in a Bond may it Corporate or Municipal. Thus as per the risk taking ability, the investors decide the particular bond scheme.

Tax Equivalent Yield Formula

Tax Equivalent Yield Formula is:

Tax Equivalent Yield Formula1

Where:

  • R (te) = taxable equivalent yield for the investor
  • R (tf) = return on tax-free investment (usually a municipal bond)
  • t = investor’s marginal tax rate

The tax equivalent yield formula is widely used to determine investment in a municipal Bond and if it is equivalent to its corresponding investment in that given taxable Bond. On the other hand in case of different tax bracket of a particular investor this calculation is very helpful in taking wise is investment decisions.

Examples of Tax Equivalent Yield Formula

Let us assume there are two investors – Investor A and Investor B.

You can download this Tax Equivalent Yield Template here – Tax Equivalent Yield Template

Investor A falls in 28 percent tax bracket where is invested B like a tax bracket of 20 does use the tax equivalent yield formula we can make sure whether a municipal Bond with interest rate of 10% per annum would be beneficial for investor A or invested B?

Tax Equivalent Yield for Investor A is Calculated as:

  • R(te) = R(tf) / (1 – t)
  • R (te) = 0.10 / (1 – 0.28)
  • R (te) = 0.10 / 0.72
  • R (te) = 0.1389 or 13.89%

Thus the taxable bond in case of Investor A must contain a yield greater than 13.89%, which would eventually be more profitable after deducting his 28% tax bracket. In other words, if the yield rate is 13.89%, the investor has would gain nothing out of the yield because of the 28% tax slab.

Tax Equivalent Yield for Investor B is Calculated as:

  • R(te) = R(tf) / (1 – t)
  • R (te) = 0.10 / (1 – 0.20)
  • R (te) = 0.10 / 0.8
  • R (te) = 0.125 or 12.5%

Investor B gets a yield of 12.5% per annum with a tax bracket of 20%

Explanation

Thus the taxable bond in case of Investor B must contain a yield greater than 12.5%, which would eventually be more profitable after deducting his 20% tax bracket.

In the case of Investor A, a taxable bond would give a return more than +13.89% to become more favorable than the 10% municipal bond. On the other hand, as Investor B has a lower tax bracket, he would get higher than +12.5% from the taxable municipal bond which tends to be more favorable than the same 10% municipal bond.

Significance and Use of Tax Equivalent Yield Formula

The major benefits of tax free yields are as follows:

  • A profitable yield which is higher than the tax rate ensures a reliable stream of regular income through interest payments from municipal bonds.
  • A properly tax equivalent yield adjust inflation and stables the value of the entire portfolio without taking any market risk.
  • In between corporate bonds and municipal bonds, there are some differences.
  • Unlike corporate bonds, the interest income from municipal bonds is always exempted from taxes. Thus to determine interest income which is exempted from taxes that is income from municipal bonds, and the interest income which is taxable that is income from corporate bonds we have to calculate with the help of tax equivalent yield calculation.
  • Thus with the help of this app of formula one can identify the best suitable element for his portfolio

There are different financial instruments through which capital can be issued such as corporate bonds and municipal bonds.

Corporate bonds are generally issued by business entities where else municipal bonds generally public projects for public services.

Thus, capital required for both business and public services are generally offered to the public in the form of debt instruments.

Municipal bonds give low return compared to corporate bonds but have tax exemption, unlike corporate bonds.

Thus an investor with low-risk bearing capacity and with high tax bracket wood considers municipal bonds over corporate bonds.

Though, the choice may vary from investor to investor depending on the requirement and there risk taking abilities.

In case of a liquid fund or debt market, there are several heels available as per the coupon rate and the current market scenario.

Does an investor should be aware of he is tax rate and the rate of return he is getting out of his investments in bonds. So in case of taking investment decision, one has to consider several points such as tax rate bond yield and interest rate.

Certain exemptions on specific bonds allow investors to save money after investing a lump sum to that particular Bond.

Tax Equivalent Yield Formula Calculator

You can use the following Tax Equivalent Yield Calculator

Tax Free Bond Yield
Tax Rate
Tax Equivalent Yield =
 

Tax Equivalent Yield =
Tax Free Bond Yield
=
(1 − Tax Rate)
0
= 0
(1 − 0)

Tax Equivalent Yield Formula in Excel (With Excel Template)

Here we will do the same example of the Tax Equivalent Yield formula in Excel. It is very easy and simple. You need to provide the two inputs i.e Tax Free Bond Yield and Tax Rate

You can easily calculate the Tax Equivalent Yield using Formula in the template provided.

Tax Equivalent Yield for Investor A is Calculated Using Formula

Calculation of R(te)

Tax Equivalent Yield for Investor B is Calculated Using Formula

Calculation of R(te) - 1

Conclusion – Tax Equivalent Yield Formula

We know that an investor goes through different ratings and purpose of taxable bonds before investing into that project. Apart from this, the investor has to take into account on the credit rating measures which the bond has given.

Another word it determines the risk associated with the bond. The higher the risk the more the interest of Bond. Thus it will be foolish to assume that a higher coupon rate Bond would be less risky. Thus taking everything into account such as coupon rate, discount rate, tenure and tax rate the investor has to decide whether the bond is actually suitable for him or not.

Tax equivalent yield formula help us to determine whether the interest income is profitable after deducting the tax percentage of that particular investor or not?

Meaning of the individual investors and as well as corporate determine their way of investment after calculating the final ILD from their born in coming years.

This is one of the major procedure through which the systematic risk and risk free return from the investment is calculated in case of a business order in case of an individual.

Recommended Articles

This has been a guide to a Tax Equivalent Yield formula. Here we discuss its uses along with practical examples. We also provide you with Tax Equivalent Yield Calculator with downloadable excel template. You may also look at the following articles to learn more –

  1. Capital Employed Formula Excel Template
  2. Calculator of Present Value Factor Formula
  3. Examples of Future Value Formula
  4. Difference between Tax Shelter and Tax Evasion
  5. Tax Multiplier Formula with Calculator
  6. Guide to Bond Yield Formula with Examples
  7. Difference between Systematic Risk vs Unsystematic Risk
Popular Course in this category
All in One Financial Analyst Bundle- 250+ Courses, 40+ Projects
  250+ Online Courses |  1000+ Hours |  Verifiable Certificates |  Lifetime Access
4.9
Price

View Course

Related Courses

Investment Banking Course (123 Courses, 25+ Projects)4.9
Investment Banking Course (123 Courses, 25+ Projects)4.8
Financial Modeling Course (7 Courses, 14 Projects)4.7
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
About Us
  • Blog
  • Who is EDUCBA?
  • Sign Up
  • Live Classes
  • Corporate Training
  • Certificate from Top Institutions
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions
  • Privacy Policy
  •  
Apps
  • iPhone & iPad
  • Android
Resources
  • Free Courses
  • Investment Banking Jobs Offer
  • Finance Formula
  • All Tutorials
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course

ISO 10004:2018 & ISO 9001:2015 Certified

© 2022 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA
Free Financial Modeling Course

3 Statement Model Creation, Revenue Forecasting, Supporting Schedule Building, & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA Login

Forgot Password?

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

Let’s Get Started

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA

Download Tax Equivalent Yield Template

EDUCBA

डाउनलोड Tax Equivalent Yield Template

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more