Sarah borrowed $25,000 from her employer at a rate of 1% interest. At the time the loan was made, the CRA's prescribed rate of interest was 3%. Sarah is in a 40% income tax bracket. What is the actual cost (rate) of Sarah's loan? (Assume there are no fluctuations in the prescribed rate of interest.)

Question

Quizplus · Accepted Answer

The actual cost of the loan is the difference between the prescribed rate and the rate Sarah is paying, multiplied by her tax bracket: (3% - 1%) * 40% = 0.8%. Adding the 1% she pays, the total cost is 1% + 0.8% = 1.8%.

Sarah Borrowed $25,000 from Her Employer at a Rate of 1