Margaret owns land that appreciates at the rate of 10% each year. Ralph owns a zero-coupon (i.e., all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%. At the end of 10 years, the bond will mature and the land will be sold. At the end of the 10 years,
A) Margaret and Ralph will have accumulated the same after-tax amounts.
B) Ralph will have accumulated a greater after-tax amount because the interest on the bond is tax-exempt.
C) Margaret will have accumulated the greater after-tax amount because the gain on the land is tax-exempt.
D) Margaret will have accumulated the greater after-tax amount but only if her marginal tax rate never exceeds 27%.
E) Margaret will accumulate the greater after-tax amount because she earns a return on the deferred taxes.

Question

Quizplus · Accepted Answer

Margaret will accumulate the greater after-tax amount because she earns a return on the deferred taxes. This is because the appreciation on the land is not taxed until it is sold, allowing the investment to grow without the annual tax drag that Ralph's bond faces, despite the bond's interest being taxed annually.

Margaret Owns Land That Appreciates at the Rate of 10