How to Convert APY to Interest Rate

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APY stands for annual percentage yield, which shows how much interest you can expect to earn (or be charged if you are borrowing money) after the effects of interest compounding are included. Interest compounding occurs when interest is added to the account more than once per year and then begins to earn additional interest. For example, if you had $1,000 in a savings account and interest was compounded monthly, at the end of the first month $1 in interest would be added. For the next 11 months of that year, that additional dollar is earning interest as well. To convert from an APY to an annual interest rate, you also need to know how many times per year interest is compounded.

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  • Convert the APY to a decimal by dividing by 100. For example, if your APY was 5.5 percent, you would get 0.055.

  • Add one to the APY expressed as a decimal. For example, 0.055 plus 1 equals 1.055.

  • Raise the result from step 3 to the 1/Nth power, where N equals the number of times per year interest is compounded. For example, if your account compounds interest monthly, you would raise 1.055 to the 1/12 power and get 1.004471699.

  • Subtract 1 from the result in step 3. For example, you would subtract 1 from 1.004471699 to get 0.004471699.

  • Multiply the result from step 4 by the number of times per year the interest is compounded. For example, since interest is compounded monthly you would multiply 0.004471699 by 12 and get 0.053660387.

  • Multiply the result from step 5 by 100 to convert to a percentage to find the interest rate. For example, you would multiply 0.053660387 by 100 to find the interest rate equals about 5.366 percent if the APY is 5.5 percent and interest is compounded monthly.

References

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