Answer:
The effective annual rate on this security
= 22.5%
Explanation:
Security's worth in one month = $100
Security's current price = $98.16
Discount value = $1.84 ($100 - $98.16)
Discount rate per month = $1.84/$98.16 * 100 = 1.8745%
Annualized effective rate = 1.8745% * 12 = 22.494%
= 22.5%
The effective annual rate (EAR) is the real return on a savings account or any interest-paying investment, which takes into account the effects of compounding over time.
