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Both the principal and interest on TVA securities are generally exempt from state and local income taxes. The effective yield on a state and local income tax exempt TVA bond may therefore be higher than that of a comparable taxable bond with the same coupon rate. The table below demonstrates what the equivalent taxable yield would be for a range of hypothetical TVA bond yields and state and local income tax rates.

 

Required Taxable Equivalent Yield* at Various State and Local Income Tax Rates
Hypothetical TVA Coupon Rate** 2% 4% 6% 8% 10%
4.00%
4.08%
4.17%
4.26%
4.35%
4.44%
5.00%
5.10%
5.21%
5.32%
5.43%
5.56%
6.00%
6.12%
6.25%
6.38%
6.52%
6.67%

 

* Without taking into account the federal deduction for any state taxes paid

** Before-tax yield

Formula for comparing yields

This simple formula can be used to compare the yields between TVA securities and similar investments that are subject to state and local income taxes: Take 1 minus the state/local income tax rate, and divide the coupon rate by this difference. The result of this calculation is the rate that would have to be obtained on a taxable investment to obtain the same after-tax income that could be earned on a TVA security, without taking into account any federal deduction for any state taxes paid and assuming that the income from the security being compared is also subject to federal taxation.

Note: TVA securities are not exempt from estate, inheritance, or gift taxes or from federal income tax. Taxes and tax issues vary due to individual circumstances. The information provided here is for comparative purposes only. Please consult a tax advisor for specific tax information.