Roy Is Considering Purchasing Land for $10,000

question 34

Essay

Roy is considering purchasing land for $10,000.He expects the land to appreciate in value 8% each year (compounded) and he will sell it at the end of 10 years.He also is considering purchasing a bond for $10,000.The bond does not pay any annual interest, but will pay $21,589 at maturity in 10 years.The before-tax rate of return on the bond is 8%.Roy is in the 40% (combined Federal and State) marginal tax bracket.Roy has other investments that earn a 8% before-tax rate of return.Given that the compound interest factor at 8% is 2.1589, and at 4.8% the factor is 1.5981, which alternative should Roy choose?

---

Definitions:

Par Value

The face value of a bond or stock, as stated by the issuing company.

Coupon

The interest payment made to the bondholders during the life of the bond.

Maple Bond

A Maple Bond is a debt security, denominated in Canadian dollars, issued by foreign companies or governments that are sold in Canada.

Canadian Bond Market

The marketplace where Canadian government and corporate bonds are issued and traded, reflecting Canada's economic condition and interest rates.