7-Day Annualized Yield
What it is:
The 7-day annualized yield is a measure of the yearly rate paid to investors of an interest-bearing account, based on the returns earned in a 7-day period.
How it works (Example):
The formula is:
7-Day Annualized Yield = ((A-B-C)/B) x 365/7
A = The value of an account at the end of the 7-day period
B = The value of an account at the beginning of the 7-day period
Let's assume Company XYZ money market fund needs to calculate its 7-day annualized return. If one share of the fund was worth $20 at the beginning of the week, $20.05 at the end of the week, and one week's worth of fees totaled $0.04, then by using the formula above, we can calculate that the XYZ fund's 7-day annualized yield was:
Yield = (($20.05 - $20- $0.04)/$20) x 365/7
= 0.02607 or 2.61%
It is important to note that the SEC strictly defines the 7-day annualized yield formula and use. It also provides strict guidelines for calculating the effects of dividend reinvestment, realized gains and losses, nonrecurring fees, and dividend taxes.
Why it Matters:
The 7-day annualized yield gives investors a way to compare interest-bearing accounts' returns. The measure tells investors what the fund would yield in a year if it continued on its current earnings path. Without this and other standardized, required disclosures, accounts could manipulate their yield calculations.
It is important to understand that the 7-day annualized yield is not the same as the 7-day effective yield. The 7-day annualized yield merely annualizes the simple yield. The 7-day effective yield is usually a little higher because it assumes income from the fund is reinvested (i.e., it compounds).