1. What is Effective Annual Yield?

Effective Annual Yield (EAY) is the actual annual rate of return that accounts for compounding effects. It shows the true annual return when compounding periods are more frequent than once per year.

2. How Does the Calculator Work?

The calculator uses the EAY formula:

Where:

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

Explanation: The formula converts a stated rate with periodic compounding into an equivalent annual rate with continuous compounding.

3. Importance of EAY Calculation

Details: EAY allows accurate comparison between investments with different compounding periods. It shows the true annual return you would earn.

4. Using the Calculator

Tips: Enter the stated annual rate in decimal form (e.g., 0.05 for 5%) and the number of compounding periods per year (e.g., 12 for monthly).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and EAY?
A: APR is the stated rate without compounding, while EAY includes compounding effects to show true annual return.

Q2: How does compounding frequency affect EAY?
A: More frequent compounding leads to higher EAY for the same stated rate.

Q3: What's a good EAY?
A: Depends on market conditions. Compare EAYs of different investments to evaluate relative returns.

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

Q5: How to convert EAY back to stated rate?
A: Use the inverse formula: \( Stated\ Rate = m \times ((1 + EAY)^{1/m} - 1) \).