Bank savings accounts have a nominal rate that is smaller than the APY, annual percentage yield, if they compound. The APY is the rate you actually receive because of the compounding. Most banks show their APY rather than the nominal rate because they want customers, and the APY is higher than the nominal rate. It makes the rate look higher to the consumer so they're more likely to place their money with the bank. You can calculate the APY on your bank savings account in a variety of ways.
Things You'll Need
- Financial calculator
- Excel spreadsheet
- Bank statement
Hand calculate the APY. If you get daily interest, it takes quite a bit of time, but it's easy math.
Find the daily interest rate. Locate the previous balance on your statement. Find out how much interest the bank added to that amount and the amount of time it took to earn that interest. Look on the line where the interest is applied. It usually states the amount you had, then the interest and finally the new balance.
Divide the amount of interest you received by the previous balance. Do this calculation for several interest rate periods since some round down and other round up. Take an average. Your answer is the periodic rate.
Complete an extra step if the bank compounds monthly. You'll have interest for varying amounts of days since months are either 31, 30, 28, or 29 days. If that's the case, divide your answer by the number of days you received interest and multiply it by 30.41667, the average number of days in a month.
Add 1 to your nominal interest and multiply that number times your balance as many times per year as the bank compounds. If they compound monthly, multiply 12 times. The process is longer if they compound daily because you have to multiply it 365 times. If your daily rate was .000274, then you'd multiply 1.000274 times your balance. Use that answer and multiply 1.000274 times your balance again until you'd completed the task 365 times. The final answer is the amount you'd have at the end of the year.
Find the APY rate once you found how much you'd have at the end of the year. Subtract the beginning balance from the final answer after you multiplied. This is the amount of interest you made for one year.
Divide the interest by the beginning balance and your answer is the APY rate.
Use a financial calculator to calculate the APY on your bank savings account. You need to know the annual nominal interest rate in order to do this. Use the first two steps in the previous section to begin the process and find the periodic rate.
Multiply the periodic rate you found by the number of times you receive interest every year, and you'll have the nominal rate. For instance, if you invest $100,000 in an account that compounds daily and get $27.40 for interest, your daily interest rate is .000274. Multiply that times 365. It comes out 10.001 percent. Since there was rounding involved in the process it's .001 percent higher, but if you averaged, it would be correct.
Enter the nominal rate in the form of a decimal. Divide it by 365 and add 1 to the results. In the scenario above, the answer would be 1.0002739726021273972602.
Use the y^x key to find the answer. Hit the key and type in 365. This gives you an answer of .10516 or 10.516 percent as the APY. If you get quarterly interest, use 4 where ever you see 365. That's the number of times the bank applies interest each year.
Notice that the APY is higher than the actual nominal rate. That's the magic of compounding. When you get interest on top of interest, it increase the actual rate you receive. The more frequent the interest rate, the better.
Paste "=POWER ((1+(A1/B1)), B1)-1" into any cell on your Excel spread sheet. Don't put in cell A1 or B1. A1 is for the rate and B1 is the frequency that you compound when you use Excel to calculate your APY.
Put the annual nominal rate in the first cell. Use the same formula to find it as you did in the previous sections to find the rate. Make sure that you put it in the form of a decimal. In this case, if it's 10 per cent, put in .10
Fill in B1 with the number of times you compound every year. In the previous scenario, it was daily so 365 would go into B1. You'll get the same answer of 10.516 percent as you did in the previous example.
Use old fashioned math to solve the equation. The formula for APY is the formula for the effective annual rate. In formula speak, it's "APY = (1 + r/n )n -- 1." In this case, the n is the number of compounds per year and r is the nominal interest rate.