where 
following our initial example presented above the investor s effective yield on his 5 coupon bond will be note that since the bond pays interest semi annually payments will be made twice to the bondholder per year hence the number of payments per year is two from the calculation above the effective yield of 5 06 is clearly higher than the coupon rate of 5 since compounding is taken into consideration to understand this another way let s scrutinize the details of the coupon payment in march the investor receives 2 5 x 1 000 25 in september due to interest compounding he will receive 2 5 x 1 000 2 5 x 25 2 5 x 1 025 25 625 this translates to an annual payment of 25 in march 25 625 in september 50 625 the real interest rate is therefore 50 625 1 000 5 06 