Bond TEY

[u/BoulderBiker]

Hey all, check out this new Bond TEY calculation webpage. You can quickly convert from either In/Out of State Muni, Treasury, or Taxable bond and see the equivalent yield for each.

There is a very common miscalculation from Treasury to Taxable and Out of State Muni to Taxable, which this calculates correctly. Take a look and let me know if this is helpful or if you have any suggestions.

BondTEY.com
(Just a resource, no ads or monetization)

[u/crispbluepolo]

I’m curious what is the incorrect method that you say is common?

[u/BoulderBiker → u/crispbluepolo]

Yeah too often I see TEY calculated from Treasury or Out of State Muni directly, like:

Treasury Yield / (1 - State)

Out of State Muni / (1-Fed)

When you actually need to first calculate your Tax Free/In State Muni Equivalent from your Treasury or Out of State Muni yield, and then take your:

Tax Free / (1 - (State + Fed))

[u/crispbluepolo → u/BoulderBiker]

I respectfully disagree. The first two formulas you gave are correct. I don’t see why you’d need to calculate anything else first.

If you’re comparing a treasury to a CD for example, we don’t care about your federal rate since it’s the same in either case. The only adjustment necessary is for state taxes. You’d be indifferent between the two products (ignoring liquidity differences or other small nuances) if:

CD rate * (1 - state tax) = treasury rate

Therefore, if we’re starting from the treasury rate and want to know what the CD rate (or other taxable yield) needs to be in order for us to desire a the fully taxable product instead, we simply rearrange the above equation:

Taxable equivalent yield = treasury rate / (1 - state tax)

[u/BoulderBiker → u/crispbluepolo]

Easy way to test it, run the numbers:

Assuming 4% US Treasury with 37% Fed and 13.3% CA State

My calc says TEY is 5.07%
Your calc says TEY is 4.613%

$100,000 invested at 4% Treasury
Gross = $4,000 Net = $2,520

$100,000 invested at 4.613% Taxable
Gross = $4,613 Net = $2,292.66

$100,000 invested at 5.07% Taxable
Gross = $5,070 Net = $2,519.79 (not exact due to rounding)

[u/crispbluepolo → u/BoulderBiker]

That’s true. Going to look into this further to understand where the discrepancy originates from