Effective yield is a measure that reflects the true return on an investment in bonds, taking into account factors such as the bond's coupon rate, its price, and the time until maturity. This yield provides a more accurate picture of the potential earnings an investor can expect compared to the nominal yield, as it considers the reinvestment of interest payments and any capital gains or losses incurred from changes in bond prices. Understanding effective yield is crucial for investors looking to make informed decisions about bond investments.
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