Your best friend consults you for investment advice. You learn that his tax rate is , and he has the following current investments and debts:
A car loan with an outstanding balance of and a APR (monthly compounding)
Credit cards with an outstanding balance of and a APR (monthly compounding)
A regular savings account with a balance, paying a
effective annual rate (EAR)
A money market savings account with a balance, paying a
APR (daily compounding)
A tax-deductible home equity loan with an outstanding balance of
and a APR (monthly compounding)
a. Which savings account pays a higher after-tax interest rate?
b. Should your friend use his savings to pay off any of his outstanding debts?
Your best friend consults you for investment advice. You learn that his tax rate is 38%, and he has the following current investments and debts: • A car loan with an outstanding balance of $5,000 and a 4.79 APR (monthly compounding) • Credit cards with
Your uncle Fred just purchased a new boat. He brags to you about the low 7.2% interest rate (APR, monthly compounding) he obtained from the dealer. The rate is even lower than the rate he could have obtained on his home equity loan (8.2% APR, monthly compounding). But if his tax rate is 26% and the interest on the home equity loan is tax deductible, which loan is truly cheaper?