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Effective Yield Formula:
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Effective Yield is a measure of the annual return on an investment that takes into account the effect of compounding. For bonds, it provides a more accurate measure of return than the nominal yield when the bond is purchased at a price different from its face value.
The calculator uses the Effective Yield formula:
Where:
Explanation: The formula accounts for both the coupon payments relative to the price paid and the compounding effect over multiple periods.
Details: Effective yield is crucial for comparing bonds with different compounding periods or purchased at premiums/discounts. It provides a standardized way to evaluate investment returns.
Tips: Enter the annual coupon payment, current bond price, periodic interest rate (as decimal), and number of compounding periods. All values must be positive.
Q1: How is effective yield different from nominal yield?
A: Nominal yield doesn't account for compounding or price differences, while effective yield does, providing a more accurate return measure.
Q2: What's the difference between effective yield and yield to maturity?
A: Yield to maturity considers all future cash flows and the face value payment at maturity, while effective yield focuses on the coupon payments relative to price.
Q3: When is effective yield most useful?
A: It's particularly useful for comparing bonds with different compounding frequencies or purchased at premiums/discounts.
Q4: How does price affect effective yield?
A: The lower the purchase price relative to coupon payments, the higher the effective yield, and vice versa.
Q5: Can effective yield be negative?
A: Yes, if the bond price is high enough relative to coupon payments, the effective yield can be negative.