Taxable equivalent yield

Consider tax-free bonds. When comparing taxable bonds with tax-free bonds, you should determine the taxable equivalent yield, or what the yield on a taxable bond needs to be if you decide to invest in that in place of a tax-free bond. However, even if the taxable equivalent yield is identical to the yield on a tax-free bond, go with the tax-free bond. Taxable bonds usually carry additional risks (especially if issued by corporations). 

As an illustration, here is how you calculate the taxable equivalent yield (TEY) for municipal bonds. Let s assume a federal tax rate of 25 percent and a tax-exempt yield of 5.45 percent. First find the reciprocal of your tax rate ... 

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