Effective Annual Yield

Effective annual yield

Annualized interest rate on a security computed using compound interest techniques.

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Effective Annual Yield

The yield on an investment in one year, taking into account the effects of compounding. For example, if one has a fixed-income investment, such as certificate of deposit that pays 3% in interest each month, the annual effective yield is more than 3% because compounding the interest results in a (slightly) greater return each month. In this example, the annual effective yield is calculated thus:

Annual effective yield = (1.03)^12 - 1 = .43 = 43%, where 1.03 is 1 plus the monthly interest and 12 is the number of times in a year interest is compounded. It is also known as the annual percentage yield.