Taxable-Equivalent Yields

The Advantages of Tax Exemption
One of the best ways to appreciate the tax-exempt advantage of a municipal security is to compare it to a comparable taxable investment. For example, assume you are in the 33% federal tax bracket, fi le a joint return with your spouse, and claim $175,000 in taxable income.

Now assume you have $30,000 to invest and you are considering two investment alternatives: a tax-exempt municipal bond yielding 5%, and a taxable corporate bond yielding 7%. Which investment will prove most advantageous? If you invested your money in the municipal bond, you’d earn $1,500 in interest (a 5% yield) and pay no federal income taxes. The taxable bond investment, however, would provide you only $1,407 in income after federal income taxes had been deducted (a 4.7% yield).