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Multiplying Factors for Taxable-Equivalent Yields
Interest income from most municipal bonds is exempt from federal income taxation, and most states exempt the interest earned on municipal bonds issued within their borders from state income taxation. These exemptions are important when comparing municipal and taxable bond yields.
The table below lists tax multiplying factors that can be used to determine a municipal bond's taxable-equivalent yield - the yield that a taxable bond would have to pro-vide to match the yield on a bond issued within a given state whose interest income is exempt from federal and state taxes. The tax multiplying factors can also be used to calculate a taxable bond's in-state equivalent yield - the yield of a taxable bond after federal and state income taxes have been deducted.
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To find a municipal bond's taxable-equivalent yield, multiply the yield on the in-state bond by the state's tax multiplying factor. To find a taxable bond's in-state equivalent yield for a given state, divide the taxable bond's yield by the state's tax multiplying factor.
For example, an Alabama resident in the 28% federal tax bracket needs to earn a 7.32% yield on a fully taxable bond (e.g., a corporate bond) to match the 5% yield of an Alabama municipal bond (5% X 1.463 = 7.32% taxable-equivalent yield). Conversely, the same Alabama resident only needs to earn a 4.78% yield on an Alabama municipal bond to match the 7% yield on a corporate bond (7% / 1.463 = 4.78% in-state equivalent yield).
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