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A tax-exempt municipal bond is trading in the market at a stated yield of 4%. A similar taxable bond is priced to a 6% yield.

A tax-exempt municipal bond is trading in the market at a stated yield of 4%. A similar taxable bond is priced to a 6% yield. Your average tax rate is 25% and your marginal tax rate is 30%. Which of the yields below is the best estimate of the tax-exempt municipal bond's Tax Equivalent Yield?

8.6%

9.3%

5.3%

5.7%

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