Effective Yield

AAA

DEFINITION of 'Effective Yield'

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.

INVESTOPEDIA EXPLAINS 'Effective Yield'

For example, if an investor holds a bond that pays a 5% coupon semi-annually, 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
  1. Forward Dividend Yield

    An estimation of a year's dividend expressed as a percentage ...
  2. Yield

    The income return on an investment. This refers to the interest ...
  3. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  4. Current Yield

    Annual income (interest or dividends) divided by the current ...
  5. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
  6. Compounding

    The ability of an asset to generate earnings, which are then ...
Related Articles
  1. Bonds & Fixed Income

    Accelerating Returns With Continuous Compounding

    Investopedia explains the natural log and exponential functions used to calculate this value.
  2. Investing

    The Advantages Of Bonds

    Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment.
  3. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  4. Bonds & Fixed Income

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  5. Investing Basics

    What is the effect of price inelasticity on demand?

    Find out why price inelasticity of demand shows the relationship between demand and price if the price of an inelastic good is either lowered or raised.
  6. Bonds & Fixed Income

    What is the lowest capitalization rate before an investment becomes unprofitable?

    Learn about different levels of profitability associated with investments featuring similar capitalization rates. Explore how value changes affect rates.
  7. Bonds & Fixed Income

    What are the benefits and drawbacks of owning preferred stock and common stock?

    Owning a share of a company can be accomplished through the purchase of common or preferred stock, but there are benefits and drawbacks for each option.
  8. Investing

    Reassessing Your Approach To Bond Investing

    Rethinking your fixed-income portfolio may not resonate in quite the same way as dropping 10 pounds or finally giving up that smoking habit.
  9. Bonds & Fixed Income

    How Diaspora Bonds Work

    Developing and emerging nations with sizable populations living overseas are using diaspora bonds to raise financing from emigrants.
  10. Bonds & Fixed Income

    How are treasury bill interest rates determined?

    Find out why interest rates for U.S. Treasury bills are determined at auction and how so-called "competitive" bidders impact returns on these debt securities.

You May Also Like

Hot Definitions
  1. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  2. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  3. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  4. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
Trading Center