The Effective Annual Yield (EAY) Calculator helps you calculate the real annual return on an investment, including the effect of compound interest. It allows investors to understand how much they will actually earn in a year when the investment compounds more than once annually.
This tool falls under the Investment Return and Interest Calculators category.
Unlike a simple annual return, EAY shows how your money grows when interest is reinvested during the year. Many investments advertise nominal returns, but these do not reflect compounding. The EAY gives a clearer picture of your true earning potential.
This is useful when comparing savings accounts, bonds, mutual funds, or other interest-bearing financial products with different compounding frequencies.
formula of Effective Annual Yield Calculator
Formula:
EAY = (1 + (Periodic Rate))^Number of Compounding Periods per Year – 1
Detailed Explanation of Variables and Calculations
EAY (Effective Annual Yield):
This is the real annualized return on an investment, shown as a percentage or decimal. It includes the benefit of compounding within the year.
Periodic Rate:
This is the interest rate for each compounding period. You can calculate it using:
- Periodic Rate = Nominal Annual Rate / Number of Compounding Periods per Year
For example, 6% annual return with monthly compounding: 0.06 / 12 = 0.005
Alternatively, if the periodic return is given (like a monthly yield), use that value directly.
Number of Compounding Periods per Year:
This represents how often the investment compounds:
- 1 = Annually
- 2 = Semi-annually
- 4 = Quarterly
- 12 = Monthly
- 365 = Daily (some institutions use 360)
^ (Exponentiation):
This symbol means raising the value inside the parentheses to the power of the number of compounding periods per year.
Key Insight:
The higher the compounding frequency, the more your investment grows annually—even with the same nominal rate.
Table for Common Investment Returns and Compounding Periods
This table gives an overview of EAY values based on typical nominal returns and compounding intervals:
| Nominal Rate | Annually | Semi-Annually | Quarterly | Monthly | Daily (365) |
|---|---|---|---|---|---|
| 4% | 4.00% | 4.04% | 4.06% | 4.07% | 4.08% |
| 5% | 5.00% | 5.06% | 5.09% | 5.12% | 5.13% |
| 6% | 6.00% | 6.09% | 6.14% | 6.17% | 6.18% |
| 8% | 8.00% | 8.16% | 8.24% | 8.30% | 8.33% |
| 10% | 10.00% | 10.25% | 10.38% | 10.47% | 10.52% |
These values help you quickly compare yields without doing the math yourself.
Example of Effective Annual Yield Calculator
Suppose you invest in a product that offers a nominal annual return of 8%, compounded quarterly.
Step 1: Identify the Variables
Nominal Rate = 0.08
Number of Compounding Periods = 4
Periodic Rate = 0.08 / 4 = 0.02
Step 2: Use the Formula
EAY = (1 + 0.02)^4 – 1
EAY ≈ 1.0824 – 1 ≈ 0.0824 or 8.24%
Conclusion:
Even though the nominal rate is 8%, your effective annual yield is 8.24% because of quarterly compounding.
Most Common FAQs
A: EAY shows the actual annual return on an investment with compounding included. APR, or Annual Percentage Rate, is used mainly for loans and may not include compounding.
A: Yes. EAY is very useful when comparing savings or deposit accounts that have different compounding intervals.
A: Yes, as long as the investment compounds more than once a year. If it compounds annually, EAY equals the nominal rate.