The interest rate at which a taxable security and a tax-exempt bond have the same rate of return. To calculate the tax equivalent yield of a tax-exempt bond for investors in different tax brackets, the tax-exempt yield is divided by the reciprocal of the tax bracket (e.g., 100 less 28%). Thus, a person in the 28% tax bracket who wants to know the tax equivalent yield of a 8% tax free municipal bond would divide 8% by 72% to get 11%--the yield a taxable security would have to return to be equivalent, after taxes, to an 8% municipal bond. To convert a taxable yield to a tax-exempt yield, the formula is reversed--the tax-exempt yield is equal to the taxable yield multiplied by the reciprocal of the tax bracket.

See Also: Equivalent Taxable Yield

This definition is in context to Investing. See more contextual defintions for Yield Equivalence.