Enter the nominal interest rate and the compounding period into the calculator. The calculator will display the effective annual yield, also known as the true yield of your investment or loan.
Effective Annual Yield Formula
The following formula is used to calculate an effective annual yield of an investment.
I = ((1 + r/m) ^m) – 1
- Where i is the effective annual yield
- r is the nominal yield
- m is the compounding periods per year
How to calculate annual yield
- First, determine the nominal rate
This will be the nominal return rate on the investment (%)
- Next, determine the compounding periods
This is the total compounding periods per year. If compounding monthly, this will equal 12 periods.
- Finally, calculate the effective annual yield
Using the equation and information above, calculate the effective annual yield (%).
Effective annual yield is a measure of the actual or true return on an investment. The reason the effective yield is slightly different is because although many are given in terms of yearly return, they actual compound in shorter intervals such as months. This leads to a slight increase in the actual return over a years period.
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