Effective Annual Yield Calculator

| Added in Business Finance

What is Effective Annual Yield?

The Effective Annual Yield (EAY) represents the actual annual return on an investment when compounding occurs more frequently than once per year. It accounts for the effect of compounding and provides a true measure of the yearly rate of return.

Formula

The Effective Annual Yield is calculated using:

$$\text{EAY} = \left(1 + \frac{r}{m}\right)^m - 1$$

Where:

  • r = nominal interest rate (as a decimal)
  • m = number of compounding periods per year

How to Calculate

  1. Enter the nominal interest rate as a percentage
  2. Enter the number of compounding periods per year (e.g., 4 for quarterly, 12 for monthly)
  3. The calculator will compute the effective annual yield

Example

For a nominal rate of 6% compounded quarterly:

  • Nominal rate: r = 0.06
  • Compounding periods: m = 4

$$\text{EAY} = (1 + 0.06/4)^4 - 1 = 0.0614$$

The effective annual yield is 6.14%, which is higher than the nominal rate due to the compounding effect.

Applications

  • Investment Analysis: Compare returns across different investment products with varying compounding frequencies
  • Loan Evaluation: Determine the true cost of borrowing when interest compounds multiple times per year
  • Financial Planning: Accurately project long-term investment growth
  • Banking Products: Compare certificates of deposit (CDs) and savings accounts with different compounding schedules

Frequently Asked Questions

The nominal rate is the stated interest rate without accounting for compounding. The effective annual yield is the actual return you earn after compounding is applied, and is always higher than the nominal rate when compounding occurs more than once per year.

More frequent compounding results in a higher effective annual yield. Daily compounding produces a higher yield than monthly, which is higher than quarterly, for the same nominal rate.

Different investments may quote rates with different compounding frequencies. The effective annual yield provides a standardized way to compare the true returns of investments regardless of their compounding schedules.

The formula is EAY = (1 + r/m)^m - 1, where r is the nominal interest rate as a decimal and m is the number of compounding periods per year.