Tax-Equivalent Yield converts a tax-exempt municipal bond yield into its taxable equivalent for comparison. A 3% muni yield in the 37% federal tax bracket equals a 4.76% taxable yield: TEY = 3% / (1 − 0.37) = 4.76%. Any taxable bond yielding less than 4.76% offers a worse after-tax return than the 3% muni. Why it matters: Munis are issued by state and local governments, and interest is federally tax-exempt (often state-exempt too). High-income investors capture the most value from munis — the higher your tax rate, the more attractive munis become. State taxes: If comparing in-state munis, use the combined federal + state marginal rate. AMT risk: Some munis are AMT-preference items — check whether the bond is subject to the Alternative Minimum Tax before relying on full tax exemption.