Answer:
Effective annual rate = 12.62%
Step-by-step explanation:
The Effective annual rate of return is the equivalent rate earned where compounding is done frequently at period or interval less than a year.
The EAR can be worked out as follows
EAR = ( (1+r)^n - 1 ) × 100
r- interest rate per period
m- number of periods in a year
EAR - Effective annual rate
So we apply this model to the questions as follows:
Cash return = 100,000- 98,039 =1,961
Return over two months = cash return /price today × 100 =
= 1,961/98,039 × 100 =2.0%
Interest per 2 month = 2.0%
DATA:
r- 2%
n - number of two months in a year = 6
Effective annual rate = ((1+0.02)^6 - 1) × 100= 12.6162 %
Effective annual rate = 12.62%