1. A $100,000 loan can be obtained at a 10 percent rate with monthly payments over a 15-year term.
a. What is the after-tax effective interest rate on the loan, assuming the borrower is in a 30 percent tax bracket and the loan is held only three years? Assume that the benefit of interest deductions for tax purposes occurs at the same time payments are made.
b. Calculate the after-tax effective cost for the above loan, assuming 5 points are charged and that the points are tax-deductible at the time they are paid.
c. How does the after-tax cost in part (b) compare with the pretax effective cost of the loan?