what is yield equivalence 
yield equivalence is the interest rate on a taxable security that would generate a return equivalent to the return of a tax exempt security and vice versa understanding yield equivalenceyield equivalence is important to municipal bond investors who want to know if the tax savings of their bonds will make up for the lower yields relative to similar duration taxable securities yield equivalence is a comparison often used by investors when they are attempting to figure out if they d get a better return from a tax exempt or tax free investment than they would from a taxable alternative yield equivalence can be calculated using the following equations taxable yield equivalence tax exempt yield 1 tax rate begin aligned text taxable yield equivalence frac text tax exempt yield 1 text tax rate end aligned taxable yield equivalence 1 tax ratetax exempt yield andtax exempt yield equivalence taxable yield 1 tax rate begin aligned text tax exempt yield equivalence text taxable yield times 1 text tax rate end aligned tax exempt yield equivalence taxable yield 1 tax rate to calculate the yield equivalence between tax exempt and taxable securities start by dividing the bond s tax exempt yield by 1 minus the investor s tax rate for example suppose you were considering an investment in a 6 tax exempt municipal bond but wanted to know what the interest rate on a taxable corporate bond would have to be to give you the same return if you have a 24 rate of taxation you would subtract 0 24 minus one which totals 76 then you would divide 6 the tax exempt yield by 76 which equals 7 9 this calculation tells you that you would need a return of 7 9 on your taxable investment to match the 6 return on the tax exempt investment if on the other hand you were in the 35 tax bracket you would need a return of 9 2 on your corporate bond to match the 6 return on your muni investment conversely if you know your taxable rate of return you can calculate the equivalent rate on a tax exempt investment this is done by multiplying the taxable rate by 1 minus your tax rate so if your taxable return is 6 and your rate of taxation is 24 you need a 4 6 return on a tax exempt security to match the after tax return on a taxable security new marginal tax ratesthe passage of the tax cuts and jobs act in late 2017 resulted in a number of changes to marginal tax rates and income brackets beginning in 2018 1 the marginal tax rate is the rate of tax income earners incur on each additional dollar of income as the marginal tax rate increases taxpayers end up with less money per dollar earned than they had retained on previously earned dollars tax systems employing marginal tax rates apply different tax rates to different levels of income as income rises it is taxed at a higher rate it is important to note however the income is not all taxed at one rate but at many rates as it moves across the marginal tax rate schedule 