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 interest. Unlike simple annual percentage rate (APR), EAY considers how often the interest is compounded during the year.

2. How Does the Calculator Work?

The calculator uses the EAY formula:

Where:

• \( Periodic\ Rate \) — Interest rate per compounding period (in decimal form)
• \( m \) — Number of compounding periods per year

Explanation: The formula shows how compounding affects the actual yield over a year. More frequent compounding leads to higher effective yields.

3. Importance of EAY Calculation

Details: EAY allows investors to compare different investment options with varying compounding periods on an equal basis. It's particularly important for bonds, CDs, and other fixed-income investments.

4. Using the Calculator

Tips: Enter the periodic interest rate as a decimal (e.g., 0.05 for 5%) and the number of compounding periods per year (e.g., 12 for monthly compounding).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and EAY?
A: APR doesn't account for compounding, while EAY does. EAY will always be equal to or higher than APR when there's more than one compounding period.

Q2: How does compounding frequency affect EAY?
A: More frequent compounding (daily vs. monthly vs. quarterly) results in a higher EAY for the same nominal rate.

Q3: Can EAY be used for loans?
A: Yes, it shows the true cost of borrowing when interest compounds more frequently than annually.

Q4: What's a good EAY?
A: This depends on current market conditions and investment risk. Higher EAY generally means better returns, but also consider risk factors.

Q5: How is EAY different from APY?
A: APY (Annual Percentage Yield) is essentially the same as EAY - both account for compounding effects.