Reference no: EM132685977

Problem 1: A home equity line of credit (HELOC) is, loosely speaking, like a credit card for your home. You can borrow money by drawing down on the line of credit. But, because the borrowed money is for the purpose of your home, the interest is tax-deductible meaning that you can deduct the interest paid on this money from your income to reduce your taxes. If the current annual interest rate on a HELOC is 3.85% and your tax rate is 32%, what is the after-tax interest rate you will pay on any borrowings under the HELOC?

Option 1: 0.026

Option 2: 0.120

Option 3: 0.012

Option 4: 0.308

Problem 2: Your daughter will start college one year from today, at which time the first tuition payment of $58,000 must be made. Assume that tuition does not increase over time and that your daughter remains in school for four years. How much money do you need today in your savings account, earning 5% per annum, in order to make the tuition payments over the next four years, provided that you have to pay 35% per annum in taxes on any earnings (e.g., interest on the savings)?

Option 1: 205,665.13

Option 2: 115,822.98

Option 3: 214,309.02

Option 4: 1,784,615.38