Please help in this investment stock case study:
Your best friend consults you for investment advice. You learn that his tax rate is 35%, and he has the following current investments and debts:
¦ A car loan with an outstanding balance of $5000 and a 4.8% APR (monthly compounding)
¦ Credit cards with an outstanding balance of $10,000 and a 14.9% APR (monthly compounding)
¦ A regular savings account with a $30,000 balance, paying a 5.50% EAR
¦ A money market savings account with a $100,000 balance, paying a 5.25% APR (daily compounding)
¦ A tax-deductible home equity loan with an outstanding balance of $25,000 and a 5.0% APR (monthly compounding)
Please help me answer these questions:
Q1. Which savings account pays a higher after-tax interest rate?
Q2. Should your friend use his savings to pay off any of his outstanding debts? Explain.