You are going to start selling your own derivative. This derivative has the following characteristics:

The financial instrument will provide cash flows every three months, with the first cash flow to occur exactly three months from today;

The value of that first cash flow will be $10, and each subsequent cash flow will grow at 4.5% (hint: the value of the second cash flow will be 4.5% higher at $10.45, and the value of the third cash flow will be 4.5% higher at $10.92025 etc);

This financial instrument will continue paying these three-month cash flows indefinitely; and,

The cost of this financial instrument today is $980.

Given the information, and the knowledge that the required rate of return will be compounded with the same frequency as the cash flows occur

What is the annual effective return on this financial instrument?

Answer rating: 100% (QA)

To determine the annual effective return on this financial instrument we need to calculate the rate ... View the full answer