Roy decides to buy a personal residence and goes to the bank for a $150,000 loan. The bank tells him that he can borrow the funds at 4% if his father will guarantee the debt. Roy's 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 Hal's guarantee to the bank.
• Cash in the CD (with no penalty), and lend Roy the funds at 2% interest.

Hal is in the 32% marginal tax bracket. Roy, whose only source of income is his salary, is in the 12% marginal tax bracket. The interest Roy pays on the mortgage will be deductible by him.

Considering only the tax consequences, answer the following.

a. The loan guarantee: Hal's interest income from the CDs would be $ before taxes and $ after taxes.

Roy's interest expense from the bank loan would be $ before taxes and $ after taxes.

This arrangement would produce an overall negative cash flow after taxes to the family of $.

b. The loan from Hal to Roy: Hal's tax on the imputed interest income from the loan to Roy would be $.

Roy's tax benefit from the imputed interest expense from Hal's loan would be $.

This arrangement would produce an overall negative cash flow after taxes to the family of $.

c. Which option will maximize the family's after-tax wealth?