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Your best friend consults you for investment advice. You learn that his tax rate is $35 \%$, and he has the following current investments and debts:

A car loan with an outstanding balance of $\$ 5000$ and a $4.86 \%$ APR (monthly compounding)

Credit cards with an outstanding balance of $\$ 10,000$ and a $14.89 \%$ APR (monthly compounding)

A regular savings account with a $\$ 30,000$ balance, paying a $5.51 \%$ EAR

A money market savings account with a $\$ 100,000$ balance, paying a $5.18 \%$ APR (daily compounding)

A taxdeductible home equity loan with an outstanding balance of $\$ 25,000$ and a $5.09 \%$ APR (monthly compounding)
a. Which savings account pays a higher aftertax interest rate?
b. Should your friend use his savings to pay off any of his outstanding debts? Explain.
Solution
VerifiedIn this exercise, we are asked to calculate different aftertax interest rates based on the inputs given.
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