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Municipal Bond Tax Equivalent Yield
This calculator will estimate the tax-equivalent yield (TEY) for a municipal bond. Income generated from municipal bond coupon payments are not subject to federal income tax. In addition, if the bond was issued in your state of residence, you can also avoid state income taxes. Use this calculator to determine the yield required by a fully taxable bond to earn the same after tax income as a municipal bond.
What else can I help you with?
What is the EQ yield of a municipal bond?
The taxable equivalent yield for a muni bond shows what you would have to earn on a taxable bond to equal the after tax return on a muni bond. Example, a muni bond has a EQ yield of 5% and you pay 20% federal income tax. The muni would actually pay interest of 4%. This is because if a taxable bond pays 5% and you pay 20% taxes, you would actually get after tax 4% (20% of 5% is 1%. 5%-1%=4%).
What is premium discount municipal bond funds?
Premium discount municipal bond funds are investment vehicles that focus on municipal bonds trading at prices above (premium) or below (discount) their face value. A premium bond typically offers lower yields due to its higher price, while a discount bond offers higher yields as it is purchased for less than face value. These funds provide investors with exposure to municipal debt, which is often tax-exempt, and can help diversify a portfolio. The choice between premium and discount bonds depends on an investor's yield preferences and tax considerations.
Into what categories are mutual funds known as bond funds divided?
Main categories in taxable bond funds are corporate bond funds, high-yield funds, world bond funds, government bond funds, and strategic income funds. The main tax-free bond fund categories are state municipal bond funds
Is interest on a municipal bond included in gross income?
No, interest on a municipal bond is generally not included in gross income for federal tax purposes. This tax-exempt status makes municipal bonds an attractive investment for many individuals, as the interest earned is free from federal income tax. However, it's important to note that some municipalities may issue bonds where the interest could be subject to state or local taxes.
How are bonds taxed?
The income from bonds is taxed, unless the bonds are exempt from federal tax (municipal bonds) and/or state tax (varies by state). If there is gain on the sale of a bond (you receive more than you originally paid for it), the gain is taxable.
What is the EQ yield of a municipal bond?
The taxable equivalent yield for a muni bond shows what you would have to earn on a taxable bond to equal the after tax return on a muni bond. Example, a muni bond has a EQ yield of 5% and you pay 20% federal income tax. The muni would actually pay interest of 4%. This is because if a taxable bond pays 5% and you pay 20% taxes, you would actually get after tax 4% (20% of 5% is 1%. 5%-1%=4%).
If corporate bonds issued by Johnson Corporation currently yield 8 Municipal bonds of equal risk currently yield 6 At what tax rate would an investor be indifferent between these two bonds?
To find the federal tax rate at which the buyer would be indifferent between Muni bonds(which are tax free) and Corporate bonds(which fall under your tax bracket tax rate) you follow this simple formula: Corporate Bond Yield=(Municipal bond Yield)/(1- Federal tax rate) In this case you would solve for the Federal Tax Rate and get an answer of .25 or 25% http://luhman.org/Nts/Bond/140_Municipals.html
How To Determine If You're Better Off With A Taxable Or Tax-Free Bond Fund?
When choosing a bond fund for your investment portfolio, there are two very broad categories to choose from - taxable bond funds that hold mostly corporate and government securities and tax-free bond funds that hold mostly municipal bonds. The average investor might be enticed by the tax-free bond fund mainly because of the words "tax-free". Who wants to pay taxes to the government if they don't have to, right? But there are definitely cases when they will not make sense. The best way to determine if a tax-free bond fund makes sense is to calculate it's taxable equivalent yield. (This is assuming that a taxable and tax-free bond fund are substantially the same investment. In reality, there are credit quality and other issues that need to be judged in addition to the yield offered before making a final investment decision.) In order to calculate the taxable equivalent yield, you'll need the tax-free yield and your current tax bracket (which can be found from your tax return, the IRS or any number of financial websites). Take the tax-free yield and divided it by one minus your tax bracket. For example, if you're in the 31% tax bracket and you can obtain a 4% tax-free yield, the taxable equivalent yield will be 5.8% (4 divided by .69). In other words, you would need to obtain a taxable yield of at least 5.8% in order to "outyield" the tax-free investment. This is why municipal bond and other tax-free funds are considered to be better suited for those in higher tax brackets. A muni fund allows a high income investor to avoid a greater level of taxes than a low income investor. It's a simple calculation but it can go a long way to point you towards the right investment.
How is a tax-exempt bond different from a bond sold by a company?
A tax exempt bond is issued by a municipality. The tax exempt status is not a property of the bond itself but is a result of tax legislation regarding municipal bond interest as being tax exempt. The interest rates on the bonds (the amount paid to the bond holder) are usually lower than on corporate bonds but because of the tax exempt status the lower rate may or may not result in a higher after tax yield depending on the rates of the two bonds and the tax bracket of the bond holder.
A seven-year municipal bond yields 4.8 percent What if your marginal tax rate is 28 percentWhat interest rate on a seven-year corporate bon of equal risk would provide you with the same after-tax retu?
Figuring Taxable-equivalent Rate for a Bond Here's the formula for figuring the precise taxable-equivalent rate for any bond: Subtract the federal marginal tax bracket percentage from the number 1, and divide the tax-free rate by the result. For example, assume you're in the 28% tax bracket and are offered a 5.75% tax-free bond. You would divide 5.75 by 0.72 (1 less 0.28) and find that the taxable-equivalent yield is 7.99%. In other words, you'd need a taxable investment paying more than 7.99% to beat the return on the 5.75% tax-exempt. In the 35% bracket, the divisor would be 0.65 (1 less 0.35) and the taxable-equivalent yield would be 8.85%. Figuring Tax-exempt Equivalent of a Taxable Yield There's a similar formula for figuring finding the tax-exempt equivalent of a taxable yield: Subtract the federal marginal tax bracket percentage from the number 1, and multiply the taxable rate by that number. The result is the tax-free rate. Assume you're considering a taxable investment yielding 8%. If you're in the 28% tax bracket, multiply 8 by 0.72 (1 less 0.28). The result is 5.76, telling you a 5.76% tax-free yield will put the same amount in your pocket, after tax, as an 8% taxable yield. In the 35% bracket, the multiplier would be 0.65 (1 less 0.35), so a tax-free yield of 5.2% will match a taxable yield of 8%.
What is premium discount municipal bond funds?
Premium discount municipal bond funds are investment vehicles that focus on municipal bonds trading at prices above (premium) or below (discount) their face value. A premium bond typically offers lower yields due to its higher price, while a discount bond offers higher yields as it is purchased for less than face value. These funds provide investors with exposure to municipal debt, which is often tax-exempt, and can help diversify a portfolio. The choice between premium and discount bonds depends on an investor's yield preferences and tax considerations.
Into what categories are mutual funds known as bond funds divided?
Main categories in taxable bond funds are corporate bond funds, high-yield funds, world bond funds, government bond funds, and strategic income funds. The main tax-free bond fund categories are state municipal bond funds
Enjoy Tax Free Municipal Bonds?
When you purchase a municipal bond, you are essentially loaning money to a local government. This loan gives a government the opportunity to do construction projects and fulfill other needs of the community. A municipal bond can make an attractive investment for an investor, because it is something that is not taxed. There is no tax associated with a municipal bond. A lot of people choose to add a municipal bond or set of bonds to a retirement portfolio. The only downfall with a municipal bond is that its interest rate is usually a lot lower than other types of investments.
Are municipal bonds tax free?
There are two types of tax free Municipal Bonds. The first is called a General Obligation and is usually the safer because it is backed by the issuer's ability to tax. Revenus Munis is the other tax free bond.
How do I cash tax free municipal bonds?
You can cash tax free municipal bonds by putting them up for sale on the bond market. Contact a local brokerage firm and they will guide you through the process.
What is bond issued by the government tax free interest?
A bond issued by the government that provides tax-free interest is typically referred to as a municipal bond. These bonds are often issued by state or local governments to fund public projects, and the interest earned is usually exempt from federal income tax, and sometimes state and local taxes as well. This tax advantage makes municipal bonds an attractive investment option for individuals in higher tax brackets seeking to minimize their tax liabilities.
What specifically is free tax municipal bonds?
A tax free municipal bond is a bond offered by some form of local government. This may be your county or city. Two places to learn more: http://en.wikipedia.org/wiki/Municipal_bond and http://www.morganstanleyindividual.com/markets/bondcenter/school/faq/default.asp
