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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 ...
The tax-equivalent yield of the muni would be 3 percent divided by the difference of (1 – 0.30). So 3 / 0.7, or 4.28 percent. In other words, the muni pays the taxable equivalent of a bond ...
Bond yield chart. If bond prices never changed, a bond’s coupon or nominal yield and its current yield would be identical. ... Tax-Equivalent Yield (TEY) – This is the return that a taxable ...
For example, assume an investor in the 38% tax bracket is offered a municipal bond that has a tax-exempt yield of 1.0%. Using the formula above, the municipal bond's taxable equivalent yield is 1.6% (0.01/(1-0.38) = 0.016) - a figure which can be fairly compared to yields on taxable investments such as corporate or U.S. Treasury bonds for ...
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
The real yield of any bond is the annualized growth rate, less the rate of inflation over the same period. This calculation is often difficult in principle in the case of a nominal bond, because the yields of such a bond are specified for future periods in nominal terms, while the inflation over the period is an unknown rate at the time of the ...
So you’ll want to calculate the tax-equivalent yield on muni bonds to see if they really do make sense for you. Munis are best in high-tax cities and states. 0 percent capital gains 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 ...
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