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 yearvsThe effective annual yield, EAY = (1 + HPY)^(365/t) - 1Can someone help perhaps with an example with how they are differed?

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?

A CFA Level 1 Discussion About Difference Between Effective Annual Rate And Effective Annual Yield?

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This topic has 1 reply, 1 voice, and was last updated Jul-181:07 pm by wannabe1988.

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- wannabe1988
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  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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