1. What is Effective Annual Yield?

The Effective Annual Yield (EAY) is the actual interest rate that an investor earns in a year after accounting for the effects of compounding. It provides a way to compare investments with different compounding periods.

2. How Does the Calculator Work?

The calculator uses the Effective Annual Yield formula:

Where:

• \( i \) — Nominal interest rate (in decimal form)
• \( m \) — Number of compounding periods per year

Explanation: The formula shows how more frequent compounding leads to higher effective yields, even when the nominal rate remains the same.

3. Importance of EAY Calculation

Details: EAY allows investors to accurately compare different investment options with varying compounding frequencies and make informed financial decisions.

4. Using the Calculator

Tips: Enter the nominal rate as a decimal (e.g., 5% = 0.05) and the number of compounding periods per year (e.g., monthly = 12, quarterly = 4).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between nominal rate and EAY?
A: The nominal rate doesn't account for compounding, while EAY shows the actual annual return including compounding effects.

Q2: How does compounding frequency affect EAY?
A: More frequent compounding (higher m) results in higher EAY for the same nominal rate.

Q3: What are typical compounding periods?
A: Common periods include annual (1), semi-annual (2), quarterly (4), monthly (12), and daily (365).

Q4: Can EAY be less than the nominal rate?
A: No, EAY is always equal to or greater than the nominal rate due to compounding.

Q5: How is this different from APY?
A: APY (Annual Percentage Yield) is essentially the same concept as EAY, both accounting for compounding.