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equivalent taxable yield

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Financial Dictionary

equivalent taxable yield

The taxable return that must be achieved in order to equal, on an aftertax basis, a given tax-exempt return. Equivalent taxable yield is calculated by dividing the available tax-exempt yield by one minus the investor's marginal tax rate. For example, a tax-exempt return of 9% for an investor in a 40% marginal tax bracket would require a taxable return of .09/0.6, or 15%, to produce the same aftertax equivalent.

Does the purchase of tax-free securities make sense?

Analyze investments for risk related to return (payout and growth) and yield. Tax-free securities have less risk, but their return is usually lower than riskier growth investments, corporate bonds, or preferred stocks. Determine the equivalent taxable yield of a tax-free security (yield divided by the difference of one minus your marginal tax bracket). Compare the investment to alternative securities with similar or higher yields or returns. Invest for a higher return if you are comfortable with the risk. Tax-free securities make sense for high-income taxpayers looking for safer, certain returns.

Jeffrey S. Levine, CPA, MST, Alkon & Levine, PC, Newton, MA

Wall Street Words: An A to Z Guide to Investment Terms by David L. Scott.
Copyright © 2003. Published by Houghton Mifflin.
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