What is being compared
A before-tax yield is not automatically the amount an investor can spend. This comparison applies the same estimated tax rate to the interest produced by a certificate of deposit and a bond, so the difference comes from the entered yield rather than from hidden tax assumptions. It compares interest earned, not market price return: a bond sold before maturity can have a gain or loss that a fixed-rate CD held to term does not have.
Formula and timing
For each option, gross interest equals principal × ((1 + yield ÷ 100)^years − 1). Estimated after-tax interest equals gross interest × (1 − tax rate ÷ 100). The primary figure is CD after-tax interest minus bond after-tax interest. Both rates are treated as annual compound yields; this is a simplifying assumption, especially for bonds quoted using different conventions or paying coupons at different intervals.
Worked example with the displayed units
With $10,000, a 4.5% CD grows to about $12,461 after five annual compounds, producing $2,461 gross interest. At a 22% tax rate, modeled after-tax interest is about $1,920. A 4.2% bond yield produces about $2,284 gross interest and roughly $1,782 after the same tax assumption. The comparison is only $138 in this case, so a small fee, different tax treatment, or a different holding period could reverse it.
When to use this result
Use this when comparing cash instruments with a stated horizon and known yields. It is useful for asking whether the yield difference is large enough to matter after tax, not for predicting a bond fund’s total return. Enter the expected holding period and compare options with similar maturity and credit risk. If the tax treatment differs by issuer or account type, use separate scenarios rather than forcing one rate to describe both.
Costs and conditions outside the fields
The calculation excludes inflation, brokerage costs, early CD withdrawal penalties, bond default risk, call risk, accrued interest, coupon timing, price changes from interest-rate moves, and tax rules that differ by jurisdiction or account. A bond yield to maturity is not a promise when the bond is sold early. Tax-exempt securities should not be modeled by merely entering zero without confirming their treatment for the investor’s jurisdiction.
Mistakes that change the answer
Do not use a coupon rate as if it were yield to maturity without checking the purchase price. Enter 4.5 for 4.5%, not 0.045. Do not subtract tax from principal; the rate applies to interest in this simple model. A five-year holding period does not guarantee a five-year CD or bond can be exited without a penalty or a market price change.
Scope of this page
This page compares after-tax interest under equal tax assumptions. A real-return tool adjusts purchasing power for inflation, while an investment-return tool can include beginning and ending market values. The form runs entirely in the browser and is an educational estimate, not investment or tax advice.
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