As investment manager of Pasco Electric Company’s pension plan (which is exempt from income taxes), you must choose between IBM bonds and AT&T preferred stock. The bonds have a $1,000 par value, mature in 20 years, pay $40 every six months, and sell at a price of $897.40 per bond. The preferred stock is a perpetuity; it pays a dividend of $2 each quarter, and it sells for $95 per share. What is the effective annual rate of return (rEAR) on the higher-yielding security?
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