Yield

The exact definition varies with the particular type of calculation, but it is generally calculated as an annualized rate of return. When using TValue for yield calculations, the yield is generally represented by the Nominal Annual Rate.

In some cases, the Effective Annual Rate deals more realistically with interest returned from the investment. It shows a real difference between an investment with monthly compounding and an otherwise identical investment with annual compounding.

Example: Adams compares investments A and B. Each calls for an investment of $1,000 today. Investment A returns $10 interest at the end of each month plus $1,000 at the end of the year. Investment B has no monthly returns, but returns $1,120 at the end of the year. Both of these investments have a Nominal Annual Rate of 12 percent, but investors would prefer A to B. Why? Because the returns from A can normally be reinvested at some rate. If we use the Nominal Annual Rate when evaluating investment A, we are assuming a zero reinvestment rate. If Adams can reinvest the monthly returns from investment A under the same (or nearly the same) terms, then the Effective Annual Rate is the more realistic measure.

You can convert from the Effective Annual Rate (EAR) to the Nominal Annual Rate (NAR) using the following formula:

NAR=[(1 + EAR)^(1/12) - 1] * 12,

where NAR is the Nominal Annual Rate and EAR is the Effective Annual Rate, based on Monthly compounding. For example, if the Effective Annual Rate is 0.12682503 (that's 12.682503 percent), then the Nominal Annual Rate is 0.12 or 12 percent.