1. What is Effective Yield?

Effective Yield (ey) is the actual return on an investment when compounding is taken into account. It provides a more accurate measure of return than the nominal rate, especially when interest is compounded multiple times per year.

2. How Does the Calculator Work?

The calculator uses the Effective Yield equation:

Where:

• \( nominal \) — Nominal interest rate (in decimal form)
• \( n \) — Number of compounding periods per year
• \( ey \) — Effective yield (in decimal form)

Explanation: The equation accounts for the effect of compounding by showing how much an investment actually grows over one year.

3. Importance of Effective Yield

Details: Effective yield is crucial for comparing different investment options with varying compounding frequencies. It provides a standardized way to evaluate returns regardless of how often interest is compounded.

4. Using the Calculator

Tips: Enter nominal rate as a decimal (e.g., 0.05 for 5%), and the number of compounding periods as an integer (e.g., 12 for monthly). Both values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between nominal and effective yield?
A: Nominal yield doesn't account for compounding, while effective yield does. Effective yield will always be equal to or higher than nominal yield.

Q2: How do I convert percentage to decimal?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05).

Q3: What are common compounding periods?
A: Annual (1), Semi-annual (2), Quarterly (4), Monthly (12), Daily (365).

Q4: Does effective yield assume reinvestment?
A: Yes, it assumes all interest is reinvested at the same rate.

Q5: How does continuous compounding work?
A: For continuous compounding, use the formula e^(nominal) - 1 where e is Euler's number (~2.71828).