Question

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 4.8% APR (monthly compounding)
Credit cards with an outstanding balance of $10,000 and a 14.9% APR (monthly compounding)
A regular savings account with a $30,000 balance, paying a 5.50% EAR
A money market savings account with a $100,000 balance, paying a 5.25% APR (daily compounding)
A tax-deductible home equity loan with an outstanding balance of $25,000 and a 5.0% 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? Explain.



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  • CreatedAugust 06, 2014
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