Municipal Bond Calculator – Calculate Your Tax Equivalent Yield

The municipal bond calculator lets you compare municipal bond yields to their corporate equivalents, to see how much higher the interest rate has to be on a taxable bond to make it competitive with a non-taxable one.  This is called your taxable equivalent yield. The tax benefits of certain bonds, for example U.S. Treasury and municipal bonds, often make them more attractive than corporate bonds with a similar interest rate.


How do you use the Municipal Bond Calculator?

You’ll need to put in the following information so that the calculator can then display the figure for the tax-equivalent interest rate:

Bond Yield (%): Enter the yield of the municipal bond you want to compare into the municipal bond calculator. For example, for a yield of 4.4%, enter 4.4

Marginal Tax Rate: For municipal Bonds (if you live in the state which the bond is issued), add together your Federal marginal tax rate, your state tax rate and your local tax rate.  For example, if you live in New York City, then depending on your income bracket, you might have a 28% Federal rate, 9% state tax rate, and 4.5% New York City tax rate for a total of 41.5% rate.

You can also use the municipal bond calculator for US Treasury bonds, you would just add your city and state income tax rate (13.5% here), as interest from U.S. Treasury bonds is still federally taxable.

Tax Equivalent Yield: When you’ve entered in the data above and clicked on “Calculate”, this is the result. The municipal bond calculator gives you the yield that you would have to earn on a corporate bond for the after tax income from the bonds to be the same as for the non-taxable ones.

What are the limitations of the Municipal Bond Calculator?

The municipal bond calculator won’t work in the opposite direction. If you want to find out what tax-free bond interest rate would correspond to a taxable corporate bond interest rate, you’ll have to use trial and error to try different values for “Bond Yield (%)” to see how close you can get to the taxable yield figure you have in mind. The calculator also assumes that the taxable and non-taxable bonds are of equivalent quality (for example, credit rating) and that the only difference is in the yield.

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