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Ricko: Calculate the effective annual rate of return for a 90 day bank bill

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Ricko buys a 90-day bank bill that will mature in 70 days for $98,600. Thirty days later, short-term interest rates fall to 6% pa and Ricko decides to sell the bill. If the bill has a face value of $100,000, determine (as an effective annual rate), the return that Ricko would have realized.

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The solution displays all the calculations for a good understanding of the concept of an effective rate of return.

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