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Your best friend consults you for investment advice. You learn that his tax rate is 39%, and he has the following current investments and
Your best friend consults you for investment advice. You learn that his tax rate is 39%, and he has the following current investments and debts: A car loan with an outstanding balance of $5,000 and a 4.82% APR (monthly compounding) Credit cards with an outstanding balance of $10,000 and a 14.96% APR (monthly compounding) A regular savings account with a $30,000 balance, paying a 5.58% effective annual rate (EAR) A money market savings account with a $100,000 balance, paying a 5.24% APR (daily compounding) A tax-deductible home equity loan with an outstanding balance of $25,000 and a 4.99% 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? a. Which savings account pays a higher after-tax interest rate? (Hint: When calculating the money market return, make sure to carry at least six decimal places in all calculations.) Regular savings pays %. (Round to two decimal places.)
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