How is the TEY (taxable equivalent yield) calculated?

The taxable equivalent yield (TEY) is determined by adjusting a tax-free yield to reflect the yield that would be necessary to achieve the same after-tax return on a taxable investment. This calculation is particularly relevant for investors in higher tax brackets, as it helps them evaluate the worth of tax-exempt investments, such as municipal bonds, relative to taxable ones.

To calculate the TEY, the correct formula divides the tax-free yield by (100% - tax bracket). This approach accounts for the tax that would be due on a taxable yield, allowing investors to determine what yield they would need to receive from a taxable investment to match the after-tax returns of a tax-free investment.

Using the formula helps clarify how much more income would be necessary from a taxable investment to equal the net income from a tax-free investment, making it easier for investors to make comparisons based on their specific tax circumstances.