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What is a “yield rate”?

November 18th, 2010

I received the following question:

Can you explain what yield rate is, how it is used, etc. in relation to annual effective rate and nominal rate of interest?

Here is my response:

“annual effective rate” is the TYPE of interest rate (as opposed to something like the nominal annual rate convertible monthly).

“yield rate” is the interest rate earned by an investor. To find this you set up an equation of value setting the time of value of her cash inflows to the time value of her cash outflows. The yield rate can be expressed as an annual effective rate, nominal annual rate convertible monthly, a force of interest, etc.

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