Question

Problem 6-30 Calculating EAR (L04] You are looking at an investment that has an effective annual rate of 146 percent. a. What is the effective semiannual return? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.) b. What is the effective quarterly return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e... 32.16.) c. What is the effective monthly return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective semiannual return Effective quarterly return c. Effective monthly rate

Answer 1

Answer a.

Effective semiannual return = (1 + Effective annual rate)^(1/2) - 1
Effective semiannual return = (1 + 0.1460)^(1/2) - 1
Effective semiannual return = 1.0705 - 1
Effective semiannual return = 0.0705 or 7.05%

Answer b.

Effective quarterly return = (1 + Effective annual rate)^(1/4) - 1
Effective quarterly return = (1 + 0.1460)^(1/4) - 1
Effective quarterly return = 1.0347 - 1
Effective quarterly return = 0.0347 or 3.47%

Answer c.

Effective monthly return = (1 + Effective annual rate)^(1/12) - 1
Effective monthly return = (1 + 0.1460)^(1/12) - 1
Effective monthly return = 1.0114 - 1
Effective monthly return = 0.0114 or 1.14%