David Abbot is buying a new​ house, and he is taking out a 30​-year mortgage. David will borrow ​$201,000 from a​ bank, and to repay the loan he will make 360 monthly payments (principal and​ interest) of $1,158.97 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 32​% 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?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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 David Abbot is buying a new​ house, and he is taking out a
30​-year mortgage. David will borrow ​$201,000
from a​ bank, and to repay the loan he will make 360 monthly payments (principal and​ interest) of $1,158.97 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 32​% 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?
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