Mr. Z, who is in the 33 percent marginal tax bracket and itemizes deductions, recently inherited $30,000. He is considering three alternative options for this windfall.
? He could buy a corporate bond paying 11 percent interest a year.
? He could pay off a $30,000 personal debt to a local bank on which he pays $2,350 interest each year.
? He could pay off $30,000 of the mortgage incurred to buy his home. This principal repayment would decrease his annual home mortgage interest expense by $2,900.
Mr. Z has asked your advice concerning which option would be most advantageous to him from an after-tax point of view. Prepare a brief memorandum in which you explain which alternative you would recommend and why.