tax-equivalent yield investment & finance definition

The pre-tax yield that a taxable bond would have to pay in order to produce the same yield as a tax-exempt investment, such as a municipal bond. To calculate the tax-equivalent yield, first subtract the income tax rate from 100, then divide the result by the yield of the tax-exempt investment, and multiply by 100. For example, if the tax rate is 28 percent and a tax-free bond pays 8 percent, then 100 - 28 = 72; 72/8 =.111; .111(100) = 11.1 percent. Under these circumstances, a taxable bond has to pay 11.1 percent in order to earn as much as the tax-free investment.