What Is an Effective Yield?

The annual effective rate of return refers to the yield of a bond within one year in consideration of various compound interest situations. The annual effective rate of return reflects the actual rate of return, which can be easily compared with the rate of return of other bonds.

Annual effective rate of return

Right!

The annual effective rate of return refers to the yield of a bond within one year in consideration of various compound interest situations. The annual effective rate of return reflects the actual rate of return, which can be easily compared with the rate of return of other bonds.

Calculation formula of annual effective rate of return

Example: Zero coupon bonds, maturing in 2 years, F = 1000, P = 850. Equity yield of bonds?

So y / 2 = 4.145% and y = 8.29%.

Annual effective yield of bonds?

(1 + 4.145%) 2 1 = 8.46% ^[1]