annualized rate and per annum rate

[bhaiyyu]

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?

 

[needhelp]

I think both are nominal. Also , you cant just double the six month rate to get the 1 year rate.

 

[bchad]

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.

 

[kutta2102]

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..

 

[bhaiyyu]

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?