Municipal bonds, often called "munis," are debt securities issued by state and local governments to finance public projects such as highways, schools, and hospitals. A key advantage of municipal bonds for many investors is their tax-exempt status at the federal level. This calculator helps you understand the true return on your investment by comparing the tax-exempt yield of a municipal bond to the taxable yield of an equivalent investment.
Key Concepts:
Par Value: The face value of the bond, typically $1,000, which is repaid to the bondholder at maturity.
Coupon Rate: The annual interest rate the issuer agrees to pay on the par value of the bond.
Purchase Price: The price at which the bond is bought in the secondary market. This can be at par, a premium (above par), or a discount (below par).
Federal Tax Bracket: The marginal income tax rate applicable to the investor at the federal level.
How the Calculator Works:
The calculator performs the following calculations:
Annual Coupon Payment: This is the straightforward annual interest income you receive.
Annual Coupon Payment = Par Value * (Coupon Rate / 100)
Tax-Equivalent Yield (TEY): This metric helps you compare a municipal bond's yield to a taxable bond's yield. It shows what rate a taxable investment would need to yield to provide the same after-tax return as the municipal bond.
TEY = (Annual Coupon Payment / Purchase Price) / (1 - (Federal Tax Bracket / 100))
The calculation uses the purchase price to determine the yield, as this reflects the actual income generated relative to what you paid.
Annual Tax Savings: This represents the amount of federal income tax you avoid by investing in the tax-exempt municipal bond compared to a taxable bond yielding the same coupon rate.
Annual Tax Savings = Annual Coupon Payment * (Federal Tax Bracket / 100)
Why Use This Calculator?
When considering an investment, it's crucial to look beyond just the stated coupon rate. This calculator helps you:
Determine the *actual* yield you're receiving based on your purchase price.
Understand the significant benefit of tax exemption by calculating your potential tax savings.
Make informed comparisons between municipal bonds and taxable investments (like corporate bonds or CDs) by calculating the tax-equivalent yield. This allows you to see which investment offers a better after-tax return for your specific tax situation.
Disclaimer: This calculator is for informational purposes only and does not constitute financial advice. Consult with a qualified financial advisor before making any investment decisions. State and local taxes may also apply and are not considered in this calculation.
function calculateMunicipalBondYield() {
var parValue = parseFloat(document.getElementById("parValue").value);
var couponRate = parseFloat(document.getElementById("couponRate").value);
var purchasePrice = parseFloat(document.getElementById("purchasePrice").value);
var taxBracket = parseFloat(document.getElementById("taxBracket").value);
var resultDiv = document.getElementById("result");
var taxEquivalentYieldSpan = document.getElementById("taxEquivalentYield");
var annualCouponPaymentSpan = document.getElementById("annualCouponPayment");
var annualTaxSavingsSpan = document.getElementById("annualTaxSavings");
// Clear previous results
taxEquivalentYieldSpan.textContent = "N/A";
annualCouponPaymentSpan.textContent = "N/A";
annualTaxSavingsSpan.textContent = "N/A";
// Input validation
if (isNaN(parValue) || parValue <= 0 ||
isNaN(couponRate) || couponRate < 0 ||
isNaN(purchasePrice) || purchasePrice <= 0 ||
isNaN(taxBracket) || taxBracket 100) {
resultDiv.style.borderColor = "#dc3545";
resultDiv.style.backgroundColor = "#f8d7da";
resultDiv.style.color = "#721c24";
return;
}
// Calculations
var annualCouponPayment = parValue * (couponRate / 100);
var actualYield = (annualCouponPayment / purchasePrice) * 100; // Yield based on purchase price
var taxSavingsRate = taxBracket / 100;
var annualTaxSavings = annualCouponPayment * taxSavingsRate;
var taxEquivalentYield = actualYield / (1 – taxSavingsRate);
// Display results
taxEquivalentYieldSpan.textContent = taxEquivalentYield.toFixed(2) + "%";
annualCouponPaymentSpan.textContent = "$" + annualCouponPayment.toFixed(2);
annualTaxSavingsSpan.textContent = "$" + annualTaxSavings.toFixed(2);
// Style for success
resultDiv.style.borderColor = "#28a745";
resultDiv.style.backgroundColor = "#d4edda";
resultDiv.style.color = "#155724";
}