effective annual yield


The yield after taking into account the consequences of compounding. It is computed as [1 + (stated interest/n)]n - 1; where n is the number of payments within the year. For instance, a bond's return is 5% and is to be paid semi-annually, thus, the effective annual yield is calculated as: [1 + (.05/2)2 - 1 = 5.062%.

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You should try to make sure that you know what a good effective annual yield will be and strive to always reach it.

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The effective annual yield was used to best take into consideration the time that would transpire from the beginning until the end of the project.

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Some newer investors do not take the Effective Annual Yield into consideration. Some bonds pay monthly returns, which effectively lower the actual yield of the bond.

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