David Abbot is buying a new house, and he is taking out a 30-year mortgage. David will borrow $192,000 from a bank,...
David Abbot is buying a new house, and he is taking out a
30-year
mortgage. David will borrow
$192,000
from a bank, and to repay the loan he will make
360 monthly payments (principal and interest) of
$1214.08
per month over the next
30 years. David can deduct interest payments on his mortgage from his taxable income, and based on his income, David is in the
30%
tax bracket.
a. What is the before-tax interest rate (per year) on David's loan?
b. What is the after-tax interest rate that David is paying?
Homework Answers
a) Before-tax interest rate per year is calculated using the RATE function:-
=RATE(nper,pmt,pv)
=RATE(360,-1214.08,192000)*12
=6.50%
b) After-tax:
=6.50%*(1-0.3)
=4.55%
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