The taxable-equivalent yield is the yield that a bondholder would need on a taxable corporate or government bond to match the same after-tax yield that a municipal bond offers. Taxable equivalent yields are commonly used as a means of comparison between bonds.
For example, suppose that a municipal bond yields 5% and a corporate bond yields 6%. While the corporate bond technically pays more, the municipal bond’s taxable equivalent yield may actually be 7% when factoring in the tax savings that it enables, making it a better deal.
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