Effective Yield

### How does effective yield differ from nominal yield? - [x] Effective yield includes the effects of compounding interest whereas nominal yield does not. - [ ] Effective yield is only used for calculating stocks returns. - [ ] Effective yield is calculated before any expenses whereas nominal yield is calculated after. - [ ] Effective yield ignores the compounding periods, focusing only on the yearly return. > **Explanation:** Effective yield takes into account the compounding periods within a year, providing a more accurate measure of the return earned, whereas nominal yield simply refers to the stated annual interest rate. ### If a bond compounds monthly with a nominal annual interest rate of 8%, what is approximately the effective yield? - [ ] 8.30% - [ ] 8.13% - [x] 8.30% - [ ] 8.00% > **Explanation:** Using the formula \\( \left(1 + \frac{0.08}{12}\right)^{12} - 1 = \approx 0.083 \\), the effective yield would be approximately 8.30%. ### What is the main advantage of knowing the effective yield compared to the nominal yield? - [ ] It gives a higher return rate. - [x] It provides a more accurate measure of the actual return accounting for compounding periods. - [ ] It is easier to calculate. - [ ] It excludes all types of taxes. > **Explanation:** The effective yield gives a more accurate measure of the actual return earned, taking into account the frequency of compounding periods within a year. ### If the APR on a loan is 5%, and it compounds quarterly, what is the effective annual interest rate? - [ ] 5.09% - [x] 5.09% - [ ] 5.12% - [ ] 6.15% > **Explanation:** The effective annual interest rate is calculated as \\( \left(1 + \frac{0.05}{4}\right)^{4} - 1 = 0.05095 \\), or approximately 5.09%. ### Does effective yield approach the nominal yield in any instance? - [ ] No, they always differ. - [ ] Yes, in all instances. - [x] Yes, when compounding occurs once annually. - [ ] Yes, when the investment period is very short. > **Explanation:** Effective yield approaches the nominal yield when there is only one compounding period (annually). ### For a bond with a nominal annual interest rate of 10% that compounds semi-annually, what would be the effective yield? - [x] 10.25% - [ ] 10.50% - [ ] 10% - [ ] 10.75% > **Explanation:** The effective yield is calculated as \\( \left(1 + \frac{0.10}{2}\right)^{2} - 1 = 0.1025 \\), or 10.25%. ### What is gross redemption yield also known as? - [ ] Annual nominal yield - [x] Yield to Maturity (YTM) - [ ] Effective Yield - [ ] Compound Yield > **Explanation:** Gross Redemption Yield is also referred to as Yield to Maturity (YTM), which measures the total return on a bond if held until it matures. ### Which of the following types of investments are influenced by effective yield? - [x] All investments with compounding periods - [ ] Only stocks - [ ] Only fixed-income securities - [ ] Only real estate > **Explanation:** Effective yield influences all types of investments that have compounding periods, including bonds, savings accounts, CDs, and other financial products. ### Can effective yield be the same as yield to maturity? - [ ] Always - [x] Sometimes, depending on compounding frequency alignment - [ ] Never - [ ] Only for zero-coupon bonds > **Explanation:** Effective yield can be the same as yield to maturity where the compounding frequency is aligned. ### Is effective yield more important for short-term or long-term investments? - [ ] Only short-term - [ ] Only long-term - [ ] Not important at all - [x] Important for both > **Explanation:** Effective yield is important for both short-term and long-term investments as it provides an accurate measure of returns due to compounding effects, irrespective of the investment period length.