APY Interest Calculator
Calculate the APY from annual interest rate and how many periods per year the interest is calculated.
What is APY Interest?
APY, or Annual Percentage Yield, is the amount of actual interest earned on an investment when you take compounding interest into consideration. Basically if you compound interest, you're earning interest on top of interest. So, if you earn 3% interest and only compound it once over a year, it's still 3% interest. If you take that same 3% interest and compound it every quarter, or 4 times per year, it's now going to effectively be worth 3.0339% return over a year. Sometimes APY is also referred to as annual percentage yield, or annual effective rate.
How to calculate APY Interest.
There are two things you need to know to calculate APY. You need the annual interest rate, and the number of times per year that the interest compounds. Some banks
will offer high-yield savings accounts that compound daily, or 365 times per year. So, the formula for calculating APY from interest and compound periods is:
APY = (1 + r/n)n n – 1
r - is the annual interest rate
n - the number of times the interest is compounded per year
Difference between APY and Interest Rate.
The difference between APY and interest rate is controlled by the principal of compound interest. If you're unfamiliar with compound interest and how it compares to simple interest, you can find more information at this Investopedia Page. APY is a result of the compounded interest created when you calculate annual interest compounded over multiple periods in a year. Just like standard interest, APY will indicate how much your money will increase by. APY is a more accurate representation of true interest gained because it takes compounding into account.
How does APY work?
Most of the time, you'll probably notice APY as a note on advertising for banks, or investments. You may also see another acronym for APR, or Annual Percentage Rate. To help give customers an idea of the true rate of return on an investment, bank account, or loan, you'll see these terms to guide customers to make a decision on what they will make on their investment, or what they will truly be charged on a loan.
What does 5% APY mean?
When you see 5% APY as part of an advertisement for a loan or investment, look for fine print that will define more information on the investment. Sometimes, they'll list an interest rate, then the terms of compounding over the course of a year, to give the final result of 5% APY. So, for example, an account with 4.889% interest that is compounded monthly, would result in an APY of 5%.