Question

Julie is considering three alternative investments of $10,000. Julie is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years.Theselectedinvestmentwillbeliquidatedattheendoffiveyears.Thealternativesare:
• A taxable corporate bond yielding 5% before tax and the interest reinvested at 5% before tax.
• A tax-favored bond that will have a maturity value of $12,200 (a 4% pretax rate of return).
• Land that will increase in value.
The gain on the land will be classified and taxed as a long-term capital gain. The interest from the bonds is taxed as ordinary income: the interest from the corporate bond as it is earned annually, but that from the tax-favored bond is recognized only upon redemption. How much must the land increase in value to yield a greater after-tax return than either of the bonds?
The compound amount of $1 and compound value of $1 annuity payments at the end of five years are given as:


$1.99
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  • CreatedMay 25, 2015
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