22. LO.4, 5 Roy decides to buy a personal residence, and he goes to the bank for a

$150,000 loan. The bank tells Roy that he can borrow the funds at 4% if his

father will guarantee the debt. Roys father, Hal, owns a $150,000 CD currently yielding

3.5%. The Federal rate is 3%. Hal agrees to either of the following.

Roy borrows from the bank with Hals guarantee provided to the bank.

Cash in the CD (with no penalty) and lend Roy the funds at 2% interest.

Hal is in the 33% marginal tax bracket. Roy, whose only source of income is his

salary, is in the 15% marginal tax bracket. The interest that Roy pays on the mortgage

will be deductible by him. Which option will maximize the familys after-tax

wealth?