Annual percentage yield calculator

Use our annual percentage yield (APY) calculator to determine the potential earnings or growth of an investment over a year.

Page written by AI. Reviewed internally on April 23, 2024.

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What is annual percentage yield?

Annual Percentage Yield (APY) is a financial term that represents the total annual rate of return an investment will earn, taking into account the effects of compounding. It is expressed as a percentage and reflects the actual interest or investment earnings over a year, including the impact of reinvesting those earnings.

Unlike the nominal interest rate, which only considers the flat rate of return without factoring in compounding, APY provides a more accurate measure of the investment’s growth potential. APY takes into account how frequently the interest or earnings are compounded, such as annually, semi-annually, quarterly, monthly, or even daily.

The APY formula considers both the principal amount (initial investment) and the accumulated interest or earnings. It calculates the interest earned on the principal and any previously accumulated interest, thereby reflecting the compounding effect.

It’s worth noting that APY assumes the investment remains untouched for the entire year and that the interest or earnings are reinvested. In reality, actual returns may vary due to factors such as market fluctuations, fees, and any early withdrawals or changes to the investment.

Definitions:

Initial amount: Initial amount is the starting balance or principal investment when you begin saving or investing.
Annual percentage rate: Annual percentage rate refers to the rate at which your investment grows or earns returns each year.
Term: The duration for which your investment accumulates returns, influencing the overall growth of your savings.
Compound interval: Compound interval refers to the periodicity at which the interest or returns on an investment are compounded.

FAQs

How to calculate APY on savings?

To calculate the Annual Percentage Yield (APY) on savings, you need to consider both the annual percentage rate and compound interval. The formula to calculate APY is:

APY = (1 + r/n)n – 1

Here, r represents the annual percentage rate (in decimal form), and n signifies the number of times interest is compounded per year. For example, if your annual percentage rate is 5% and it compounds monthly, the formula would be:

APY = (1+ 12/0.05)12 − 1

What Is the difference between APY and interest rate?

APY and the interest rate differ in their consideration of compounding effects. While the interest rate is a straightforward percentage indicating the return on investment, APY encompasses the impact of compounding. APY reflects the actual earnings over a year, including reinvested earnings, providing a more accurate measure of growth potential.

What Is a good APY for a savings account?

Determining a favorable APY for a savings account involves evaluating various factors, including current market conditions and personal financial objectives. Typically, a higher APY signifies better returns on savings. However, it's essential to assess other aspects such as fees and minimum balance requirements. Conducting comparisons across different financial institutions can help identify the most suitable option for maximizing savings growth.