APY Calculator
Understanding Annual Percentage Yield (APY)
The Annual Percentage Yield (APY) is a crucial metric for anyone looking to maximize their savings or evaluate investment opportunities. Unlike a simple interest rate, APY accounts for the effect of compounding, providing a more accurate picture of your actual earnings over one year.
How APY Differs from Nominal Interest Rate
A nominal interest rate (or APR) is the stated rate that doesn't consider compounding within the year. However, most financial institutions compound interest daily or monthly. This means you earn interest on your original deposit plus the interest that has already accumulated. APY captures this "interest on interest" effect.
The Mathematical Formula for APY
To calculate APY manually, we use the following formula:
- r = The nominal annual interest rate (decimal)
- n = The number of compounding periods per year
Compounding Frequency Comparison
The frequency with which interest is added to your balance significantly impacts the total yield. Here is how different compounding frequencies affect a 5.00% nominal rate:
| Frequency | Periods (n) | Effective APY |
|---|---|---|
| Annually | 1 | 5.0000% |
| Quarterly | 4 | 5.0945% |
| Monthly | 12 | 5.1162% |
| Daily | 365 | 5.1267% |
Why Use an APY Calculator?
When comparing High-Yield Savings Accounts (HYSA), Certificates of Deposit (CDs), or Money Market Accounts, banks are legally required to disclose the APY. Using this calculator allows you to reverse-engineer a rate if only the nominal rate and compounding frequency are known, helping you choose the most profitable financial product for your goals.