SECTION IV: INVESTMENTS

4.5	=	4.5	=	6.25% Tax-Equivalent Yield
(1 - .28)		.72

This calculation informs investors they would need a fixed income investment that will yield at least 6.25 percent before tax to get the same after-tax yield as the bond above at a 4.5 percent tax-free yield.

Now, let's compare the two bond options. Which is more tax advantageous? The first bond option with a 4.5 percent tax-free yield because as the calculation illustrates, another bond would have to be at least 6.25 percent before tax to get the same after-tax yield. However, the second bond choice only had a 5.0 percent taxable yield which is lower than needed. Therefore, the first bond option is more tax advantageous.

Using the same two bonds in the example, let's walk through how to determine the tax-free equivalent yield using the formula below.

Tax-Free Equivalent Yield = Taxable Interest Rate X (1-Federal Tax Rate)

5.00 × (1 - .28)
5.00 × .72
3.60%

This calculation informs investors they would need a fixed income investment that with a tax-free yield of at least 3.60 percent to be equivalent to the 5.0 percent taxable bond.

Let's look again at the two bond options. The first bond option has a 4.5 percent tax-free yield. After calculating the tax-free equivalent yield on the 5.0 percent taxable bond (3.60 percent), it's clear that the first option has a higher tax-free yield and is more tax advantageous.

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