Equivalent taxable yield

While taxable bonds normally pay higher interest rates than tax-exempt bonds, they sometimes provide a lower overall yield.

Finding the equivalent taxable yield lets you determine the minimum interest rate a taxable bond must pay to equal the yield of a comparable tax-exempt bond. The formula for the equivalent taxable yield is tax-exempt interest rate ÷ (100 - your tax rate).

So, for example, if a municipal bond pays an annual interest rate of 7%, and your tax rate is 35%, the equivalent taxable yield would be 7 ÷ (100 - 35) = 10.8%. That means that in order to be as attractive an investment as the 7% municipal bond, a taxable bond would need to pay an annual interest rate of 10.8% or more.