Consider a 6% two-year Treasury security that pays coupon semi-annually. Suppose the 6- month, 1-year, 1.5-year, and 2-year spot rates are 3%, 3.5%, 4%, and 4.5%, respectively. All rates are bond-equivalent basis, i.e., all rates here are annual with semi-annual compounding.

An investor is considering investing in this Treasury security for one year only. The investor expects to be able to reinvest his interim cash inflow at 5% until the end of his investment horizon. The bond yield of this two-year bond one year later is expected to be 3.8%. What is the expected effective annual total return of the investors investment?