What is the effective annual rate for this investment

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Assume that you sell short a 3.5% semi-annual coupon bond when the market interest rate is 4% (and you buy on a coupon payment date so that the price is clean). You deposit the short proceeds plus a 15% haircut that you pay out of your own capital. 18 months later, interests rates have risen to 4.3%, and you close the position by buying back the bond. If the repo rate is 2%, what is the net profit from these trades? What is the percent return, based on your out-of-pocket capital investment only? What is the effective annual rate for this investment?

Reference no: EM131957949

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