4 min Read Mar 22, 2019
Effective Yield is the total annual return on a bond investment that accounts for the effect of compounding when coupon payments are reinvested at the same rate as the bond's coupon rate. It is higher than the simple coupon rate when coupons are paid more frequently than annually. Effective Yield = (1 + Nominal Rate/n)ⁿ – 1, where n is the number of compounding periods per year. For fixed-income investors comparing bonds with different coupon frequencies and structures, the Effective Yield provides a standardised measure of actual return.
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