Municipal Bond Tax Equivalent Yield Calculator Overview
If you are interested in investing in the securities market then you may want to consider investing in municipal bonds. Municipal bonds, also referred to as munis, are usually issued by governmental organizations like local governments, states, cities, and even school districts.
These organizations issue municipal bonds in order to raise funds needed for a specific capital development project. In exchange for cash, the entity agrees to repay the bond holder within a specific period of time with interest. Most municipal bonds mature between 20 and 40 years; however, some municipal bonds have shorter maturity rates.
Example: the local government wants to build a new highway
The highway will cost $2 million. If they don’t already have the cash available to finance the project, the local Government needs to borrow the money from somewhere.
They can go to the bank, but the interest rate is high and doesn’t offer value for taxpayer money. So instead they decide to make bonds available for members of the public to buy – 200 bonds worth $10,000 each.
These bonds have a yield of 5% and mature after 20 years – this means that at the moment of maturity, the local government will repay the bond in full, plus any outstanding interest.
How To Use The Municipal Bond Tax Equivalent Yield Calculator
Here's how to get started:
- Enter the bond yield – this is like the interest you are charging the organization for the privilege of using your money for their project
- Input your total estimated taxable income – accounting for any adjustments
- Add the level of income tax you are required to pay by your state
- Select the appropriate tax filing status from the drop-down list
- Click Calculate to see your results represented in a bar graph – you will see your original tax equivalent yield, alongside how much it is when exempted from Federal tax, or State and Federal tax
- To see the results in a table instead, click View Report.
Who is this Calculator for?
This calculator is most useful if you:
- Are considering investing in a tax-exempt municipal bond
- Would like to compare the benefits of municipal bonds with differing exemptions
What are the pros and cons of investing in municipal bonds?
Among the advantages of investing in a municipal bond is that the interest earned on a municipal bond investment is usually exempt from federal taxation. This makes municipal bonds a possible tax shelter option for your income. Additionally, you can generally expect a better rate of interest than a savings account, and although bonds are higher risk, the nature of the organizations that offer municipal bonds (local governments, schools, etc) provide a certain level of assurance.
The disadvantage with most bonds is not having access to the money as and when you need it, however many municipal bonds offer call provisions, allowing you to recall your funds – at the cost of losing interest payments. As implied above, the risk of default is lower than with corporate bonds, although municipal bonds are more susceptible to interest rate fluctuations – particularly those with long maturity.