How do I compare interest rates on tax free vs taxable bonds?

V

Vince

Is there a function on Excel--Vista--where I can compare the interest rates
(coupon rate) on tax free municipal bonds vs taxable corporate bonds?

Thanks
 
D

Duke Carey

One of two ways:

1) simply divide the tax-exempt rate by (1-effective tax rate), to make it
taxable equivalent, or
2) multiply the the taxable rate by (1-effective tax rate), to make it
after-tax

Effective tax rate means the total of your marginal Federal, state, and
local income tax rates. Keep in mind that some tax-exempt bonds are only
Federally exempt, others are Federally AND State exempt, and a few are triple
tax-exempt - Fed/State/local. Typically, the more 'exempt' a bond is, the
lower its coupon
 
M

MyVeryOwnSelf

Is there a function on Excel--Vista--where I can compare the interest
One of two ways:

1) simply divide the tax-exempt rate by (1-effective tax rate), to
make it taxable equivalent, or
2) multiply the the taxable rate by (1-effective tax rate), to make it
after-tax

Effective tax rate means the total of your marginal Federal, state,
and local income tax rates. Keep in mind that some tax-exempt bonds
are only Federally exempt, others are Federally AND State exempt, and
a few are triple tax-exempt - Fed/State/local. Typically, the more
'exempt' a bond is, the lower its coupon
Click to expand...

Also keep in mind:

Treasury security interest is taxable federally, but not by the state
(these securities weren't mentioned in the original post).

Interest on out-of state municipal bonds is taxed by the state (at least
here in California).

The state income tax paid on corporate bond interest is deductible on one's
federal return, slightly reducing the effective federal tax rate.

I know: picky, picky. ;-)
 
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