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Difference between Effective annual rate and Effective Annual Yield?

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    • Avatar of wannabe1988wannabe1988
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        • CFA Level 1
        21 Jul 2018 at 1:44 am
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        Hi guys, I am a little confused by the difference between the both.

        The Effective Annual rate has the follow formula, EAR = (1 + periodic rate)^n where periodic rate = Stated annual rate/no of compounding within a year

        vs

        The effective annual yield, EAY = (1 + HPY)^(365/t) – 1

        Can someone help perhaps with an example with how they are differed?

      • Avatar of wannabe1988wannabe1988
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          • CFA Level 1
          22 Jul 2018 at 1:07 pm
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          I think I have understood the difference between EAR and EAY. EAR is used to capture the effect of more than one compounding per year. EAY annualised a yield to make it comparable to other one year yield. 

          I have two new questions now though.

          1) Why is BEY formula BEY=[(1 + EAY)^1/2] – 1? why do you square the first term? Am I right to say BEY function is to restate any yield with monthly, quarterly or semi-annually compounding into one year yield?  

          2)How do you know when to use EAY, money market yield and bond equivalent yield?

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