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David Abbot is buying a new​ house, and he is taking out a 30​-year mortgage. David will borrow ​$192,000 from a​ bank,...

David Abbot is buying a new​ house, and he is taking out a

30​-year

mortgage. David will borrow

​$192,000

from a​ bank, and to repay the loan he will make

360 monthly payments​ (principal and​ interest) of

​$1214.08

per month over the next

30 years. David can deduct interest payments on his mortgage from his taxable​ income, and based on his​ income, David is in the

30​%

tax bracket.

a. What is the​ before-tax interest rate​ (per year) on​ David's loan?

b. What is the​ after-tax interest rate that David is​ paying?

business   finance   
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Answer #1

a) Before-tax interest rate per year is calculated using the RATE function:-

=RATE(nper,pmt,pv)

=RATE(360,-1214.08,192000)*12

=6.50%

b) After-tax:

=6.50%*(1-0.3)

=4.55%

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