Assume that you presently have a monthly home mortgage with a stated interest rate of 7% APR.Also assume that you are able to deduct your interest on your tax return.If your income tax rate is 20%,then the after-tax EAR for your home mortgage is closest to:

Question

Quizplus · Accepted Answer

First, we need to calculate the monthly EAR for the mortgage:

EAR = (1 + APR/n)^n - 1
where APR = 7% and n = 12 (since it's a monthly mortgage)

EAR = (1 + 0.07/12)^12 - 1
EAR = 0.07268 or 7.268%

Next, we need to adjust for the tax deduction. Since we're in the 20% tax bracket, we're effectively only paying 80% of the interest on the mortgage. So our after-tax EAR would be:

After-tax EAR = EAR x (1 - tax rate)
After-tax EAR = 0.07268 x (1 - 0.2)
After-tax EAR = 0.05814 or 5.814%

Therefore, the closest after-tax EAR for the home mortgage is 5.8%, which is answer choice C.

Assume That You Presently Have a Monthly Home Mortgage with a Stated