APY Calculator
The Annual Percentage Yield (APY) Calculator
What is Annual Percentage Yield?
Knowing about Annual Percentage Yield, or APY, is important for your finances. Often, people get confused between this rate and other rates. The APY Calculator will help you understand and become familiar with how APY operates and its impact on your money.
You may sometimes see the APY rate called the ‘annual interest yield’, or sometimes as ‘the effective annual rate’. Be aware of these, as they are basically talking about the annual percentage yield, or APY.
In terms of savings, investments and loans, the APY is the actual amount of interest earned in a year. It is worth noting that this rate includes the effect of any compounding that might have taken place across that period so that you get an accurate figure for the annual interest amount.
This is therefore a really important rate for calculating profitability and for making comparisons with other possible ways of investing your money.
Calculating APY
To determine the APY you must use the following formula. It may seem complicated, but it is actually quite simple to follow.
APY = (1+r/n)^n - 1
The components are as follows:
r = annual ~interest ~rate \\(as ~a ~decimal)
n = the ~number ~of ~times \\~your ~product ~calculates \\~compound ~interest ~in ~a ~year.
For example, if your product calculates it monthly, use 12. If it calculates it quarterly use 4. If it is twice yearly, use 2.
Here is an example. You want to calculate the APY on $2000 of savings on a rate of 5% where the interest is compounded quarterly.
(1 + 0.05/4)^4 - 1 = 0.0509
So the APY is actually 5.05%
Use the calculator to workout the rates that work to your advantage. Remember that if you are using it on a savings product, then the higher the APY the more advantageous for you. If you are using it to calculate the APY on a car loan, for example, then, as with any loan you take out, you want the APY rate to be as low as possible.
Be aware of the sneaky ways rates can differ
If you are taking out a savings product or a loan, bear in mind the difference between APY and the headline interest rate that may be attached to a product. This is sometimes written as the nominal interest rate – the one named on the product.
The key difference between a nominal interest rate and the annual percentage yield rate is that the APY also takes into account the effect of any compounding on the figure you are either saving or borrowing in relation to the interest rate for the product.
You need to think of the headline or nominal interest rate in the context of the term of the repayments and the nature of any compounding in order to get the actual cost or benefit to you.
These rates can be confusing, but the site can help you. Have a look at our other rate calculators, like our APR Calculator, to help you see how subtle – but important – these differences can be.
We want to make sure we take rates and products that work for us, not the banks. To do that, you need to be armed with appropriate ways of understanding what are often slightly confusing rates. Especially when you are taking out a loan, where the interest rates may be higher than your savings rates – therefore meaning you are potentially worse off overall – you need to have this information to hand, so that you can make meaningful assessments of what is in your financial interest. Do not be bamboozled by salesmen or ads – know your calculations by using the calculators.
