How to Calculate Equivalent Yield
- 1). Determine the yield on the tax-free bond. This is clearly stated with the issuance. Assume the yield is 15 percent.
- 2). Determine your current tax rate. This varies by individual; you can use your tax rate from last year as an estimate. Assume your current tax rate is 10 percent.
- 3). Divide the tax-free bond yield by 1 minus your tax rate. For instance, in this example, the calculation is: .15 / (1 - .10) = .15 / .90 = .166666667 or 16.7 percent. This means that you need to make at least 16.7 percent on a taxable investment in order for it to provide a comparable return.
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