What is Yield Equivalence?
Yield equivalence has to do with the balance that is required between the yield that is achieved on a taxable investment and the amount realized on the tax-free return that is offered on a bond. Sometimes referred to as an equivalent taxable yield, the concept behind the yield equivalence is to create a situation where amount of profit that is made from an investment that is subject to tax is balanced out by the profit that is achieved by the bond. By doing so, the overall impact of the tax payment on the investor is minimized. Monitoring the yield equivalence within this type of arrangement involves making appropriate choices in the selection of municipal bonds and on other types of investments that are subject to taxes. Ideally, the yield on the bond will be sufficient to cover the taxes that are assessed for the taxable investment and still make a small amount of profit. This use of the tax-exempt yield helps to keep the overall worth of the investment portfolio stable. By creating
