Chapter 9, Problem 9.3P

Before-tax cost of debt and after-tax cost of debt David Abbot is buying a new house, and he is taking out a 30-year mortgage. David will borrow $200,000 from a bank, and to repay the loan he will make 360 monthly payments (principal and interest) of $1,199.10 per month over the next 30 years. David can deduct interest payments on his mortgage from his taxable income, and based on his income, David is in the 30% tax bracket.

1. a. What is the before-tax interest rate (per year) on David’s loan?
2. b. What is the after-tax interest rate that David is paying?