APY Calculator
Calculate the Annual Percentage Yield (APY) for an investment.
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Understand the Real Return on Your Savings
Annual Percentage Yield (APY) reflects the real rate of return on an investment by taking the effect of compound interest into account. This calculator computes the APY based on the nominal interest rate and the number of compounding periods per year, showing you the true earning potential of your savings or investment.
The APY Formula Explained
APY = (1 + r/n)ⁿ - 1
- r: The nominal annual interest rate (as a decimal).
- n: The number of times the interest is compounded per year.
How to Use the Calculator
- Stated Annual Interest Rate (%): Enter the advertised interest rate.
- Compounding Periods per Year: Enter how many times the interest is compounded. (e.g., 1 for annually, 4 for quarterly, 12 for monthly, 365 for daily).
Real-World Example
A savings account offers a 5% nominal interest rate, compounded monthly.
- r: 0.05
- n: 12
- Calculation:
APY = (1 + 0.05 / 12)¹² - 1 ≈ 0.05116 - The APY is 5.116%. This means that due to monthly compounding, your money effectively grows by 5.116% over the course of a year.
Frequently Asked Questions (FAQ)
- Why is APY higher than the nominal interest rate? Because of compounding. You earn interest not just on your principal, but also on the interest that has already been credited to your account. The more frequently interest is compounded, the higher the APY will be.
- What's the difference between APY and APR?
- APY (Yield) is used for savings and investments. It tells you how much your money earns. Higher is better.
- APR (Rate) is used for loans and debt. It tells you how much you pay. Lower is better.
- Which is more important when choosing a savings account? APY is the more accurate measure for comparing savings accounts because it reflects the true earning potential after accounting for the power of compounding.