How to Calculate Effective Yield

How to Calculate Effective Yield
You can calculate yields on your investments.

Determine the number of payment periods ("n") in a year. Some securities pay every six months, in which case the number of periods is two. In this example, the number of payment periods is 12 (monthly).

Determine the interest rate ("i"). This is the nominal or stated interest rate on the security. For example, say you own a bond that pays 6 percent every month.

Divide the interest rate (in decimal form) by the number of periods. In this example, .06 / 12 = .005.

Find the sum of 1 + "i/n". The calculation is 1 + .005 = 1.005.

Take the sum of the calculation in Step 4 to the exponent "n." The calculation is 1.005^12, or 1.061677812.

Subtract 1 for the effective (annualized) yield. The calculation is 1.061677812

  • 1 = .061677812, or 6.17 percent.