Tax Free Yield

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The main benefit in investing in municipal bonds is gaining the tax free yield. The attractiveness of this rate of return will depend on the nominal yield and the tax bracket of the investor.

The higher the bracket - the higher the tax free or equivalent yield. You calculate the after tax return by taking the stated rate, coupon rate or given yield if issued at par and divide that by 100 - the bracket of the investor.

Example

A 6% muni bond at par with an investor in the 28% tax bracket would calculate as follows: 6 divided by 72 (100-28) = 8.33%.

If an investor was looking to compare this investment against a taxable bond like a corporate bond - the taxable bond would have to yield over 8.33% for this investor to be interested in it.

The tax free yield formula is the same if it was a G.O. Bond or a revenue bond. It is based on the federal ordinary income bracket and the stated yield.

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