APY (Annual Percentage Yield) Calculator
What is APY and How is it Calculated?
Annual Percentage Yield (APY) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Unlike simple interest, APY reflects how often the interest is added to your balance. The more frequently interest is compounded, the higher the APY will be relative to the nominal interest rate.
The APY Formula
To calculate APY manually, you use the following mathematical formula:
APY = (1 + r/n)n – 1
- r = The nominal annual interest rate (as a decimal)
- n = The number of compounding periods per year
Practical Examples of APY Calculations
Consider a savings account with a 5% nominal interest rate. Let's see how the compounding frequency changes the actual yield:
| Compounding Frequency | Nominal Rate | Calculation | Resulting APY |
|---|---|---|---|
| Annually | 5.00% | (1 + 0.05/1)^1 – 1 | 5.0000% |
| Monthly | 5.00% | (1 + 0.05/12)^12 – 1 | 5.1162% |
| Daily | 5.00% | (1 + 0.05/365)^365 – 1 | 5.1267% |
Why APY Matters for Savers
When comparing financial products like savings accounts, CDs (Certificates of Deposit), or money market accounts, the APY is the most important metric. It provides a "level playing field" for comparison. A bank offering a 4.05% rate compounded daily might actually yield more than a bank offering 4.10% compounded annually.
APR vs. APY: What's the Difference?
While APY is typically used for deposit accounts (where you earn money), APR (Annual Percentage Rate) is typically used for loans and credit cards (where you owe money). APR usually represents simple interest, whereas APY accounts for the compounding effect. If you are looking at a credit card, the "Interest Rate" is often the APR, but the effective cost of that debt over a year if you don't pay it off is actually the APY.