Taxable Equivalent Yield Definition & Meaning | Financial Term | CSIMarket
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Glossary

Taxable Equivalent Yield

Financial Term

Taxable Equivalent Yield (TEY) is a measure of the yield of a tax-free investment compared to a taxable investment. TEY is used in the financial industry to help investors evaluate the relative value of tax-free investments, such as municipal bonds, compared to investments that are subject to taxation, such as corporate bonds.

The TEY calculation takes into account the tax rate applicable to the investor*s income level. It is calculated by dividing the yield of a tax-free investment by 1 minus the investor*s tax rate. For example, if a tax-free investment has a yield of 3% and an investor*s tax rate is 20%, the TEY would be 3/(1-0.2) = 3.75%.

The TEY provides a way for investors to compare the yield of tax-free investments to taxable investments on an equal footing. Without the TEY calculation, investors might be misled by the apparent yield on tax-free investments, which appears lower due to their tax-free status.

Overall, the TEY is a crucial measure for investors who are seeking to compare the value of different types of investments and make informed decisions about their portfolio.


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