In K.B.’s inquiry of 2/09/05 (see below, “Taxable equivalent”) pertaining to computing equivalent returns on taxable vs non-taxable bonds, you referred to a chart entitled “Tax-exempt/Taxable Yield Equivalents” in the Bond Basics section of your Web site. The problem is, it doesn’t give the complete picture on equivalents. It pertains to federal tax only and therefore is applicable only to those few states with no state income tax. Most people reside in states that have state income taxes and, obviously, this tax must be considered when computing equivalents between taxable and non-taxable instruments. In California, where I reside, the maximum income tax rate is 9.3% – a substantial amount. To determine if a state tax-exempt bond or bond fund is appropriate, one must compute the tax-exempt bond or bond fund’s “taxable equivalent yield.” This figure enables one to take federal and state income taxes into account when comparing the potential returns from taxable and non-taxable instruments. For completeness, I believe it should be mentioned when questions arise relating to equivalents between tax exempt and taxable instruments.
C.A., California