Do you think there is a difference between the two? Are they both ‘effective’ rates or is one of them nominal? Investopedia says Annualized rate is nominal, like if i Pay 5% per 6 months, it is 10% Annualized. Somehow I disagree. Any comments?
I think both are nominal. Also , you cant just double the six month rate to get the 1 year rate.
I think it’s APR is arithmetically added. Annual percentage rate = 12%, so each month you get 1% APY is compounded (Yield being the keyword for compounding). Annual percentage yield = 12%, so each month is a bit less than 1%, but it compounds to 12%. I always found it tricky to figure out things like bond equivalent Yields, when to compound and when not to. For example, a bond paying 6% coupon per year, and semiannual payments is said to pay 6% even though there is time value / reinvestment value in the 3% payment you get after 6 months. So I guess a semiannual bond with 1 year to go, selling at par paying 6% coupon should have a YTM higher than 6%, but a BEY of only 6%? In a practical application, I usually know which one to use, but to answer CFA problems, I’ve always been confused.
IMO, “per annum rate” is nominal and “annualized rate” is effective rate. Generally, you will see something like this: Sales have grown 5% per annum. Here, the measurement period is exactly one year. In bond math, annualized rate is most certainly the effective rate computed by compounding the semi-annual interest rate…
thanks for your comments. I think Per annum is always quoted as “x% per annum payable monthly/quarterly/half-yearly”, so we can calculate the effective rate. I think ‘annualized’ rates are mostly used for instruments with tenure less than a year, so if i have a 91 day T bill, it makes sense to calculate a yield, say 1%, and then multiply by 4 to get an annualized yield of 4%. I can compare this annualized yield with a 180 day note that pays 1.5% ( = 1.5*2 = 3% annualized yield) to have an ‘apple for apple’ comparison. any more ideas?