A client holds a 3.5% municipal bond and is in the 37% federal bracket. What taxable yield would they need to do better?

How to answer

Use the taxable-equivalent yield: muni yield ÷ (1 − marginal tax rate) = 3.5% ÷ (1 − 0.37) = 3.5% ÷ 0.63 ≈ 5.56%. So a fully taxable bond would have to yield more than about 5.56% to beat the muni after federal tax for this client. The higher the client's bracket, the more attractive munis become. (If the muni is also state-tax-exempt for them, you'd use a combined rate, which pushes the break-even even higher.)

Key idea: muni yield ÷ (1 − tax rate).