Effective Annual Yield Calculator
Calculate the Effective Annual Yield (EAY) from nominal interest rates. EAY shows the true annual return on investments and savings accounts when compounding is considered.
EAY Results
Investment Comparison
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Current Market Yields (2024)
High-Yield Savings: 4.5-5.5% EAY
CDs (1 Year): 5.0-6.0% EAY
Money Market: 4.0-5.0% EAY
Note: Yields vary by institution and market conditions
Understanding Effective Annual Yield (EAY)
Effective Annual Yield (EAY) measures the true annual return on an investment or savings account when compounding is taken into account. It represents what you actually earn over a full year, making it easier to compare different investment options.
EAY Formula
The formula for calculating EAY is:
EAY = (1 + r/n)^n - 1
Where: r = nominal annual yield, n = number of compounding periods per year
EAY vs. Nominal Yield
| Aspect | Nominal Yield | Effective Annual Yield |
|---|---|---|
| What it measures | Stated annual return | True annual return with compounding |
| Compounding effect | Ignores compounding | Includes compounding effect |
| Comparison accuracy | Limited for different frequencies | Accurate across all products |
| Always true | EAY = Nominal Yield | When compounding occurs |
Impact of Compounding Frequency
More frequent compounding results in higher EAY. The difference is more pronounced with higher nominal yields.
| Compounding | 5% Nominal Yield | 8% Nominal Yield |
|---|---|---|
| Annually | 5.00% | 8.00% |
| Quarterly | 5.09% | 8.24% |
| Monthly | 5.12% | 8.30% |
| Daily | 5.13% | 8.33% |
EAY in Investment Products
- Savings Accounts: Shows true return on deposits
- Certificates of Deposit: Reveals actual CD yields
- Money Market Accounts: Compares true yields
- Bonds: Calculates effective yields with compounding
- Mutual Funds: Annualizes returns with compounding
Regulatory Disclosure
Financial institutions are required to disclose EAY for savings and investment products to ensure consumers understand the true returns.
- Truth in Savings Act: Requires EAY disclosure for deposit accounts
- Investment Company Act: Mandates yield disclosure for mutual funds
- SEC Regulations: Requires standardized yield calculations
- Banking Regulations: EAY disclosure for CDs and savings products
Practical Examples
High-Yield Savings Account
Account advertising 4.5% APY with monthly compounding:
- Nominal Yield: 4.5%
- EAY: (1 + 0.045/12)^12 - 1 = 4.60%
- You earn 4.60% annually on your savings
Certificate of Deposit
1-year CD with 5.25% nominal yield compounded quarterly:
- Nominal Yield: 5.25%
- EAY: (1 + 0.0525/4)^4 - 1 = 5.37%
- True annual return is 5.37%
When EAY Matters Most
- Comparing Products: Different compounding frequencies
- High Nominal Yields: Larger compounding effect
- Long-term Savings: Compounding grows over time
- Investment Selection: Choosing between similar products
- Performance Evaluation: Assessing true investment returns
EAY vs. APY
EAY and APY (Annual Percentage Yield) are essentially the same concept, both representing the effective annual rate. The terms are often used interchangeably in financial contexts.
Tip: Always look at EAY when comparing savings and investment products. The nominal yield alone can be misleading, especially when products have different compounding frequencies. EAY gives you the true annual return, helping you make better financial decisions.