How this number is made
A municipal bond that is exempt from federal tax can be compared with a taxable bond by grossing its yield up. The tax-equivalent yield is the municipal yield divided by one minus your marginal rate. State tax on an out-of-state bond is not in this unless you put it in the rate.
- Use the yield on the municipal bond, not its coupon if the price is not par. Yield is what matters.
- The tax rate is the rate you would pay on a taxable bond instead.
Formula
Tax-equivalent yield = municipal yield ÷ (1 − tax rate).
Worked example
With the figures already in the form, taxable yield that matches is 4.71%.
Questions
Are all municipal bonds exempt?
Federal exemption is common and not universal. Some private-activity bonds are subject to the alternative minimum tax. This page assumes the yield you typed is actually tax-free to you.
What about my state’s tax?
A bond from your own state is often state-exempt too. An out-of-state bond may not be. Raise the tax rate to include a state tax you would otherwise pay.