Answer:
The answer is 6.40%.
Explanation:
As the corporate bond of equal risk to municipal bond ( that is, the return on the corporate bond should not be higher for compensating higher risk in comparison to municipal bond), the after-tax return on the municipal bond should be equal to the municipal bond yield (because income from municipal bonds is tax-free) to make the return on the two financial asset indifferent. In other words, only tax factor that differentiate the nominal returns of these two equal risk-adjusted return financial assets.
Denote x is the return on corporate bond needs to be found. We haveL
4.8% = x * (1-tax rate) <=> 4.8% = x * 75% <=> x = 6.40%
So, the answer is 6.40%.
