Effective Annual Yield Calculator
Calculate the real annual return on bond investments considering coupon reinvestment
Calculate Effective Annual Yield
The bond's principal amount (maturity value)
Total yearly coupon payments
How often coupon payments are made per year
Effective Annual Yield Results
Formula used: (1 + coupon rate / coupon frequency)^coupon frequency - 1
Calculation: (1 + 0.00% / 2)^2 - 1
Coupon Frequency: 2 payments per year
Yield Analysis
Example Calculation
Corporate Bond Example
Face Value: $1,000
Annual Coupon: $50
Coupon Rate: 5% ($50 / $1,000)
Payment Frequency: Semi-annual
Calculation Steps
1. Coupon Rate: $50 ÷ $1,000 = 5%
2. Formula: (1 + 5% ÷ 2)² - 1
3. Calculation: (1 + 0.025)² - 1
4. Result: 1.050625 - 1
Effective Annual Yield: 5.0625%
The 0.0625% premium comes from reinvesting semi-annual payments.
Payment Frequency Impact
Annual
No compounding benefit
EAY = Coupon Rate
Semi-annual
Most common for bonds
Moderate compounding effect
Monthly
Higher compounding benefit
Maximum practical frequency
Bond Yield Tips
Higher payment frequency increases effective yield
EAY shows true return potential with reinvestment
Compare bonds using EAY, not just coupon rates
Consider reinvestment risk in volatile markets
Understanding Effective Annual Yield
What is Effective Annual Yield?
Effective Annual Yield (EAY) represents the real annual return an investor can earn from a bond when coupon payments are reinvested at the same rate. It's more accurate than the simple coupon rate because it accounts for the compounding effect of reinvestment.
Why Use EAY?
- •Provides true comparison between bonds with different payment frequencies
- •Shows the actual earning potential with reinvestment
- •Helps evaluate the compound growth of bond investments
- •Essential for portfolio optimization and yield comparison
EAY Formula
EAY = (1 + r/n)^n - 1
- r: Annual coupon rate (decimal)
- n: Number of coupon payments per year
- EAY: Effective Annual Yield
Key Components
Face Value
The bond's principal amount paid at maturity
Coupon Rate
Annual coupon payment divided by face value
Payment Frequency
How often coupons are paid per year
Frequency Comparison Example
| Frequency | Payments/Year | 5% Coupon → EAY | Benefit |
|---|---|---|---|
| Annual | 1 | 5.0000% | - |
| Semi-annual | 2 | 5.0625% | +0.0625% |
| Quarterly | 4 | 5.0945% | +0.0945% |
| Monthly | 12 | 5.1162% | +0.1162% |