Home
Back
APY Formula:
| From: | To: |
APY (Annual Percentage Yield) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Unlike simple interest, APY considers how often interest is applied to the balance, which can increase the total amount earned.
The calculator uses the APY formula:
Where:
Explanation: The formula calculates the effective annual rate of return by accounting for how frequently interest is compounded throughout the year.
Details: APY provides a standardized way to compare investment products with different compounding schedules. It helps investors understand the true earning potential of certificates of deposit (CDs) and other interest-bearing accounts.
Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%) and the number of compounding periods per year (e.g., 12 for monthly compounding). All values must be valid (interest rate ≥ 0, compounding periods ≥ 1).
Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) represents the simple interest rate without compounding, while APY includes the effect of compounding, giving a more accurate representation of actual earnings.
Q2: How does compounding frequency affect APY?
A: The more frequently interest is compounded, the higher the APY will be for the same nominal interest rate, resulting in greater earnings over time.
Q3: What are typical compounding frequencies for CDs?
A: Common compounding frequencies include daily, monthly, quarterly, semi-annually, and annually, with daily compounding typically yielding the highest APY.
Q4: Can APY be negative?
A: While theoretically possible with negative interest rates, APY is typically positive for standard banking products like CDs in normal economic conditions.
Q5: Is APY the same as effective annual rate (EAR)?
A: Yes, APY and EAR are essentially the same concept - both represent the effective annual interest rate when compounding is taken into account.