What Is an Effective Annual Return?

The effective annual rate of return indicates the annual rate of return that investors can obtain if they hold the maturity date of the bond and reinvest the interest for six months at 1/2 of the bond's equivalent rate of return.

Effective annual rate of return

Right!

The effective annual rate of return indicates the annual rate of return that investors can obtain if they hold the maturity date of the bond and reinvest the interest for six months at 1/2 of the bond's equivalent rate of return.

Assuming that the first interest in a year can be regenerated, the actual annual rate of return is equal to half a year (1 + Y / 2) times the next half year rate (1 + Y / 2), which is often called the effective annual rate .

The effective annual yield is always higher than the yield to maturity of the bond. The same methodology and terminology apply to bonds that pay interest more frequently than half a year.