So I’m confused on exactly what’s going on between the two of these. My understanding is that the effective annual rate allows you to convert a stated interest rate with a number of compounding periods greater than one into an interest rate that includes the effects of compounding. For example 5% annual interest compounding monthly is 5.12% EAR.
For the effective annual yield, it’s (1+HPY)^(365/t)-1. What exactly is this telling me? If I have an instrument that matures in say 120 days and I have the HPY I can punch it in, but what does the output mean? Unlike with EAR, I’m not given a compounding period, is it implied somehow?
EAR and EAY are the same thing: the actual amount of interest that you would earn in one year.
Yes, as they’re effective rates, they can be compounded.
It’s telling you that if you earn, say, 2% for 120 days, and you can continue to earn 2% for every 120-day period, then in 365 days you’ll earn (1.02)^(365/120) − 1 = 6.2084%.
The compounding period for the 2% is 120 days, and the compounding period for the 6.2084% is 365 days.