How to Calculate Annual Percentage Yield

The Annual Percentage Yield is the amount an account actually grows over the course of a year assuming there is a set deposit amount that isn't touched over the course of the year. It is far more accurate in assessing the productivity of an account than Annual Percentage Rate since it factors in compounding of interest.

Difficulty:

Moderate

Instructions

Things You'll Need

• Calculator
• Account information

How to Calculate Annual Percentage Yield

1. Start with the Annual Percentage Rate of an account. That is the amount of interest the account is paying over the course of one year.

2. Factor in how often interest is compounded. The more often interest is compounded the higher the Annual Percentage Yield will be. An account that compounds interest daily will yield more money than an account that compounds monthly or quarterly.

3. Understand that the Annual Percentage Yield will always be higher than the Annual Percentage Rate of an account. This is because you are earning interest on your interest over the course of the year.

4. Calculate the Annual Percentage Yield with the following formula: APY = (r/n +1)^n - . Divide the annual percentage interest rate stated as a decimal by the number of compounding periods in a year. If interest is compounded monthly then there are 12 compounding periods. If it is daily then there are 365 compounding periods. Add the number 1 then multiply the sum exponentially by the number of compounding periods. Subtract the number 1 from that total. This is your Annual Percentage Yield.

5. Compare the Annual Percentage Yield of various accounts to see which one will make you the most money. The higher the Annual Percentage Yield the more you will gain. The APY is a valuable tool since it tells you exactly how much money you will make over a year. It takes other variables out of the equation for you.

Tips & Warnings

• Annual Percentage Yield is a great way to compare the earning power of accounts, but it does not tell you everything. Always consider fees and obligations before making investment decisions. Read all disclosures and prospectuses completely before risking your money.

Resources

• Read this Article in Spanish
• What Is APY?
• APY Savings Account
• What Is Annual Percentage Rate?
• How Does a Bank CD Work?
• How Do Interest Rates Work?
• How Does a Money Market Account Work?
• What Is the Prime Lending Rate?
• Emerging Dragon .com