Suppose you pay $9400 for a $10 000 par Treasury bond maturing in six months. What is the effective annual rate of return for this investment?

Question

Quizplus · Accepted Answer

The effective annual rate of return is the annual rate of return that would have been earned if the investment had been held for one year. To calculate the effective annual rate of return, we use the following formula:EAR = (1 + (FV/PV)^(1/n)) - 1where:EAR is the effective annual rate of returnFV is the future value of the investmentPV is the present value of the investmentn is the number of yearsIn this case, the future value of the investment is $10,000, the present value of the investment is $9,400, and the number of years is 0.5. Plugging these values into the formula, we get:EAR = (1 + (10,000/9,400)^(1/0.5)) - 1EAR = 1.1317 - 1EAR = 0.1317 or 13.17%Therefore, the effective annual rate of return for this investment is 13.17%.

Suppose You Pay $9400 for a $10 000 Par Treasury