Effective Annual Yield-Calculator question

[PDEM200]

Hello David,
Can you please clarify the role of EAR (effective annual yield) vs I/Y function on the TI-Calculator.Put simply, is it true that for our PV/FV calculations, we are only interested in the periodic rate(= stated interest rate / number of periods of compounding in a particular year).
The EAR would not be used as an I/Y input?

Regards

 

[David Harper CFA FRM]

Paul,

Yes, your terminology is exactly right. e.g., 6% semi-annual coupon with 8% per annum yield
8% per annum = STATED rate. The semi annual coupon suggests semiannual compound frequency (k = 2 periods per year)
Such that EXCEL PV = (8%*2, Years * k, 6%*par/2, par)
and the calculator takes I/Y input of 8%/k = 8%/2 periods per year
(and for consistency: N = years * k, PMT = coupon*par/k)

EAR would not be used...of course, if annual compound frequency (k=1) only then does EAR = stated rate, otherwise EAR not used and must be greater; e.g., here EAR = (1+8%/2)^2-1
David

 

[PDEM200]

Thanks very much