What is the 'Effective Yield'
The effective yield is the yield of a bond, assuming that you reinvest the coupon (interest payments) once you have received payment. Effective yield is the total yield an investor receives in relation to the nominal yield or coupon of a bond. Effective yield takes into account the power of compounding on investment returns, while nominal yield does not.
Next Up
BREAKING DOWN 'Effective Yield'
For example, if an investor holds a bond that pays a 5% coupon semiannually, he will actually receive two coupon payments per annum. If the investor reinvests each coupon payment then his effective yield will be greater than the stated coupon rate or nominal yield. Reinvesting the coupon will produce a higher yield, because interest is earned on the interest payments.
RELATED TERMS

Coupon
The annual interest rate paid on a bond, expressed as a percentage ... 
Short Coupon
A payment made on a bond within a shorter time interval than ... 
Required Yield
The return a bond must offer in order to be a worthwhile investment. ... 
Bunny Bond
A type of bond that offers investors the option to reinvest coupon ... 
Current Coupon Bond
A bond with a coupon rate that is within 0.5\% of the current ... 
Realized Yield
The actual amount of return earned on a security investment over ...
Related Articles

Investing Basics
Explaining the Coupon Rate
Coupon rate is the stated interest rate on a fixed income security. 
Bonds & Fixed Income
Comparing Yield To Maturity And The Coupon Rate
Investors base investing decisions and strategies on yield to maturity more so than coupon rates. 
Bonds & Fixed Income
Advanced Bond Concepts: Yield and Bond Price
In the last section of this tutorial, we touched on the concept of required yield. In this section we'll explain what this means and take a closer look into how various yields are calculated. ... 
Investing
Understanding the Different Types of Bond Yields
Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment. 
Bonds & Fixed Income
Advanced Bond Concepts: Bond Pricing
It is important for prospective bond buyers to know how to determine the price of a bond because it will indicate the yield received should the bond be purchased. In this section, we will run ... 
Retirement
Bond Basics: Yield, Price And Other Confusion
Investopedia Explains: Bond yield, Bond price, yield to maturity, the link between price and yield and bond price in the market. 
Investing Basics
What is a "Coupon"?
In the financial world, “coupon” represents the interest rate on a bond. 
Bonds & Fixed Income
Simple Math for FixedCoupon Corporate Bonds
A guide to help to understand the simple math behind fixedcoupon corporate bonds. 
Bonds & Fixed Income
What is Reinvestment Risk?
Reinvestment risk refers to the risk that a bond’s future coupons will have to be reinvested at a lower interest rate. 
Personal Finance
Ripped Off By A Store Coupon? Try These Tips
Not all coupons are real. We list some tips on how to tell the difference between a fake and a genuine coupon.
RELATED FAQS

How does a bond's coupon interest rate affect its price?
Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >> 
What is the difference between the yield of stock and the yield of a bond?
Explore and understand the various meanings of the investment term "yield" as it is applied to equity investments and bond ... Read Answer >> 
How do I calculate yield to maturity of a zero coupon bond?
Find out how to calculate the yield to maturity for a zero coupon bond, and see why this calculation is more simple than ... Read Answer >> 
How does a bond's coupon rate affect its price?
Find out how a bond's coupon rate influences its price, including the role of governmentdictated interest rates and the ... Read Answer >> 
How can I calculate a bond's coupon rate in Excel?
Find out how to use Microsoft Excel to calculate the coupon rate of a bond using its par value and the amount and frequency ... Read Answer >> 
Why do bond coupon rates vary so greatly?
Learn about the two major reasons that cause bond coupon rates to vary so dramatically and what role coupons play in the ... Read Answer >>