A money market security with a PV of $10K sells for $8,816. It matures in 2 years, what is the rate of return

Question

A money market security with a PV of $10K sells for $8,816. It matures in 2 years, what is the rate of return

Answer 1

OK. First 10K would be the FV, the PV is $8,816. Over a period of two years the $8,816 grows to $10,000 (an increase of 13.43%). The compounded yearly rate of return would then be equal to [(return+1)^(1/number of years)]-1 or [(.1343+1)^(1/2)]-1, which is 6.5036%.  By the way, compound simply implies that the formula takes into consideration that the interest gained on the first year will be reinvested at the same rate during the second year as the principle.