The 10% semi-annual coupon bond selling at par has the greater effective annual return than the $100,000, 3-month T-Bill selling at $97,645.
<h3>Data and Calculations:</h3>
T-Bill:
Face value of T-Bill = $100,000
Present value of the T-Bill = $97,645
Effective yield rate = 9.65% ($2,355/$97,645 x 100 x 12/3)
Bond:
Face value of bond =$100,000
Interest = 10% semi-annual
Present value of the bond = $104,761.90
Effective yield rate = 9.80%
Thus, the 10% semi-annual coupon bond selling at par has the greater effective annual return than the $100,000, 3-month T-Bill selling at $97,645.
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