Muni yield divided by one minus the applicable tax rate
Interest on many US state and local obligations is exempt from federal income tax, while the issuer should identify whether a specific obligation is taxable. Some bonds also receive state or local exemptions. Tax-equivalent yield is the pre-tax taxable yield that leaves the same after-tax interest. Enter the marginal tax rate that would apply to the taxable alternative but is actually avoided by the muni interest; do not automatically add a state rate when this muni remains taxable by that state. Dividend yield is a stock income ratio. APY converts compounding. Real return adjusts for inflation, not tax.
After-tax taxable yield = taxable yield × (1 − applicable marginal tax rate)
Example
A 3.5% muni that avoids a 37% marginal rate has a 5.555…% taxable-equivalent yield, about 5.56%. Bankrate’s 3% muni at a 30% applicable rate is about 4.29%. The same 3% muni at 40% is 5%. A 5.56% taxable bond subject to a 37% rate keeps about 3.50% after tax.
What the identity leaves out
This page does not determine a bond’s tax status or load IRS brackets, NIIT, AMT, state tables, or interactions among taxes. A 100% tax rate is rejected because the denominator is zero. Credit risk, call features, and holding-period tax treatment of principal stay outside the coupon comparison.