CFA CFA Level 1 EAY vs EAR – what’s the difference?

# EAY vs EAR – what’s the difference?

• This topic has 2 replies, 2 voices, and was last updated 2w by gontata.
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• gontata
Participant

Can someone help me understand what are the differences between effective annual yield (EAY) and effective annual rate (EAR)? Is there actually a difference between EAY vs EAR or are they the same thing?

mikey
Participant

The concept of both is the same thing – calculating the annualized return rate of a security.

Effective annual yield (EAY) usually calculates the annualized holding period yield (HPY) or yield to maturity (YTM), which is the return earned when a security is held until maturity. Remember that EAY:

• (Usually) assumes 365 days in a year
• Incorporates compounding

Formula:

$EAY={\left(1+HPY\right)}^{\frac{365}{t}}–1$

where HPY = holding period yield (or YTM)

Effective annualized rate (EAR) is usually converting a % rate (e.g. nominal 8% paid quarterly) to a rate that indicates the actual interest paid when compounding is taken into account. EAR tends to ‘scale up’ or ‘scale down’ payment periods such as semi-annually, quarterly, etc.

So for a nominal 8% rate paid quarterly:

Formula:

gontata
Participant

Thanks for the thorough answer, this helps a lot!

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