Bob needs money and goes to the bank for a $150,000 loan. The bank tells him that he can borrow the funds at 5% if someone will guarantee the debt. Bobs brother, Pat, owns stock currently worth $150,000 that he bought 5 years ago for $100,000. The Federal rate is 3%. Pat agrees to either of the following:

Bob borrows from the bank with Pats guarantee to the bank.

Pat sells the stock and lends Bob the funds at 2% interest.

Pat is in the 30% marginal tax bracket, and his capital gains are taxed at 15%. Bob, whose only source of income is his salary, is in the 10% marginal tax bracket.

a) Which option will maximize the familys after-tax wealth in the first year of the loan, assuming the interest expense is not deductible to Bob?

b) Using the same facts from part (a), now assume that instead of stock, Pat owns a $150,000 CD currently yielding 3.5% that he will cash in to lend Bob the funds at 2%

c) Using the same facts from part (b), now assume Bob was borrowing the money to purchase a home, and that any interest he pays on the loan will be deductible to him.

d) Using the same facts from part (c), now assume that the loan is for only $100,000, and Pat is willing to charge the minimum that the IRS will impute.

*This is a tough problem- do your best!