what is the effective yield 
the effective yield is the return on a bond that has its interest payments or coupons reinvested at the same rate by the bondholder effective yield is the total yield an investor receives in contrast to the nominal yield which is the stated interest rate of the bond s coupon effective yield takes into account the power of compounding on investment returns while nominal yield does not understanding effective yieldthe effective yield is a measure of the coupon rate which is the interest rate stated on a bond and expressed as a percentage of the face value coupon payments on a bond are typically paid semi annually by the issuer to the bond investor this means that the investor will receive two coupon payments per year effective yield is calculated by dividing the coupon payments by the current market value of the bond effective yield is one way that bondholders can measure their yields on bonds there s also the current yield which represents a bond s annual return based on its annual coupon payments and current price as opposed to the face value though similar current yield doesn t assume coupon reinvestment as effective yield does the drawback of using the effective yield is that it assumes that coupon payments can be reinvested in another vehicle paying the same interest rate this also means that it assumes the bonds are selling at par this is not always possible considering the fact that interest rates change periodically falling and rising due to certain factors in the economy effective yield vs yield to maturity ytm the yield to maturity ytm is the rate of return earned on a bond that is held until maturity to compare the effective yield to the yield to maturity ytm convert the ytm to an effective annual yield if the ytm is greater than the bond s effective yield then the bond is trading at a discount to par on the other hand if the ytm is less than the effective yield the bond is selling at a premium ytm is what s called a bond equivalent yield bey investors can find a more precise annual yield once they know the bey for a bond if they account for the time value of money in the calculation this is known as an effective annual yield eay example of effective yieldif an investor holds a bond with a face value of 1 000 and a 5 coupon paid semi annually in march and september he will receive 5 2 x 1 000 25 twice a year for a total of 50 in coupon payments however the effective yield is a measure of return on a bond assuming the coupon payments are reinvested if payments are reinvested then his effective yield will be greater than the current yield or nominal yield due to the effect of compounding reinvesting the coupon will produce a higher yield because interest is earned on the interest payments the investor in the example above will receive a little more than 50 annually using the effective yield evaluation the formula for calculating effective yield is as follows 