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 @ 4% if his father will guarantee the debt. Roys father, Hal, owns a $150,000 CD currently yielding 3.5%. The Federal rat is 3%. Hal agrees to either of the following:

* Roy borrows from the bank with Hals guarantee 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 Roy pays on the mortgage will be deductible by him.

Which option will maximize the familys after-tax wealth?