HOW TO CALCULATE YOUR TAXABLE EQUIVALENT YIELD FOR FEDERAL TAXES

If you want to figure your taxable equivalent yield when only federal taxes are involved, use this formula:

Here is how it works. Imagine you pay federal taxes at the 28 percent marginal rate. Now suppose that you are considering buying a municipal bond that earns 6 percent interest. To calculate how much you would need to earn on a taxable bond to equal your 6 percent after-tax rate, enter the numbers:

You would have to earn 8.22 percent on a taxable bond to equal your 6 percent municipal bond.

Next, we will discuss how to figure your taxable equivalent yield with state taxes included.