Answer:
The answer is 6.25%
Explanation:
A municipal bond is tax free.
With a federal income tax bracket of 20%, the first thing is to calculate the reciprocal of the tax bracket: 20% = 0.2
= 1 - tax rate = 1 - 0.2 = 0.8
The next step is to divide the rate at which the municipal bond is trading by the reciprocal of the tax rate earlier calculated.
5/0.8 = 6.25%
