- 1). Determine the number of payment periods ("n") in a year. Some securities pay every six months, in which case the number of periods is two. In this example, the number of payment periods is 12 (monthly).
- 2). Determine the interest rate ("i"). This is the nominal or stated interest rate on the security. For example, say you own a bond that pays 6 percent every month.
- 3). Divide the interest rate (in decimal form) by the number of periods. In this example, .06 / 12 = .005.
- 4). Find the sum of 1 + "i/n". The calculation is 1 + .005 = 1.005.
- 5). Take the sum of the calculation in Step 4 to the exponent "n." The calculation is 1.005^12, or 1.061677812.
- 6). Subtract 1 for the effective (annualized) yield. The calculation is 1.061677812
- 1 = .061677812, or 6.17 percent.
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