After-Tax Yield: Definition and Example

The after-tax yield is the yield an investor keeps after accounting for taxes on interest or other income.

It is especially important in bond and cash management because a quoted yield can overstate the investor’s real take-home income.

How It Works

A simplified version is:

after-tax yield = pretax yield x (1 - tax rate)

This works best when the entire yield is taxed at a single rate. Real-life calculations can be more complicated when different parts of the return receive different tax treatment.

Worked Example

Suppose a bond yields 6% and the investor faces a 32% marginal tax rate.

The after-tax yield is:

6% x (1 - 0.32) = 4.08%

That means the investor keeps just over 4% after taxes rather than the full 6% headline yield.

Scenario Question

An investor says, “The taxable bond has a higher stated yield, so it must be the better income choice.”

Answer: Not necessarily. A lower tax-advantaged yield can still produce more after-tax income.

Related Terms

• Taxable Yield: The pretax yield before taxes are applied.
• Equivalent Taxable Yield: Converts a tax-free yield into the taxable yield needed to match it.
• After-Tax Return: The broader performance version of the same idea.
• Bond Yield: After-tax yield is a key way to interpret bond income in taxable accounts.
• Marginal Tax Rate: The investor’s marginal tax rate often drives the calculation.

FAQs