Yield Equivalence

No one (normal) likes to pay taxes. So it’s important to know the ways to calculate whether or not you can avoid having to add another line item to your 1040 by analyzing your investment options.

For example, there are a number of closed-end-funds and municipal bonds that you can buy that are tax-exempt. So you don’t have to pay anything on the yield that you receive each year from these investments.

However, being a smart investor, you don’t want to just leave money on the table. So...take a look at other investments like corporate bonds that would pay a solid return, and subtract the tax requirements out of the return.

If you find one tax-exempt bond of investment that has the same return as the after-tax return of corporate bond or stock, you’ve discovered two investments with a yield equivalent. You’ve also done a lot of math, probably more than you ideally wanted to do on a Saturday.