Margaret Owns Land That Appreciates at the Rate of 10

question 114

Multiple Choice

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.

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Definitions:

Non-directional

Hypotheses that predict a relationship between variables without specifying the direction of the relationship.

Null Hypothesis

A statistical hypothesis that assumes no significant difference or effect exists.

Means

The average of a set of numbers, calculated by summing the numbers and then dividing by the count of those numbers, used to summarize data.

μ

Symbol representing the mean of a population in statistics.