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Bonds can provide passive income, some of which may be tax-free if you're investing in municipal bonds. The tax-equivalent yield formula can be a useful tool for comparing taxable and tax-free ...
For example, imagine you pay federal tax at a 24 percent rate and state tax at a rate of 6 percent, and the municipal bond offers a yield of 3 percent. The tax-equivalent yield of the muni would ...
While tax-free passive income may sound great, you might make more overall if you purchased taxable bonds and simply paid the tax. So you’ll want to calculate the tax-equivalent yield on muni ...
Comparing the yield on a municipal bond to that of a corporate or U.S. Treasury bond can be misleading, because of differing tax treatment of the income from the two types of securities. For that reason, investors use the concept of taxable equivalent yield to compare municipal and corporate or Treasury bonds. The taxable equivalent yield on a ...
If the tax rate is denoted as t, the before-tax nominal earning rate is i, the amount of taxes paid (per dollar or other unit invested) is i × t, and so the after-tax nominal earning is i × (1–t). Hence the expected after-tax real return to the investor, using the simplified approximate Fisher equation above, is given by
A return of 10% taxed at 25% gives an after-tax return of 7.5%; 0.10 x 0.25 = 0.025 0.10 − 0.025 = 0.075 = 7.5% Investors usually seek a higher rate of return on taxable investment returns than on non-taxable investment returns, and the proper way to compare returns taxed at different rates of tax is after tax, from the end-investor's ...
*Note: To compare municipal bond funds with taxable funds, investors calculate a taxable equivalent yield, which can be determined by dividing the municipal yield by (1-tax rate).
The formula for calculating 30-day yield is specified by the U.S. Securities and Exchange Commission (SEC). [1] The formula translates the bond fund's current portfolio income into a standardized yield for reporting and comparison purposes. A bond fund's 30-day yield may appear in the fund's "Statement of Additional Information (SAI)" in its ...