How to Calculate Percentage Yield

The annual percentage yield takes into account interest compounding.

Interest rates can either be stated as the annual percentage rate or the annual percentage yield. The annual percentage rate represents the sum of the periodic rates for the year. For example, if a bank charges 0.6 percent interest every month, the annual percentage rate would be 7.2 percent. However, this number fails to account for compound interest, which is the interest earned by the prior interest payments. In order to incorporate the compounding interest, you must calculate the annual percentage yield.

Things You'll Need

• Calculator

Instructions

1. Calculate the periodic rate on the account by dividing the annual interest rate by the number of compounding periods per year. The period rate is the interest rate per compounding period. Depending on how often your interest is compounded, this could be the semiannual rate, the quarterly rate, the monthly rate or even the daily rate. For example, if the annual interest rate on the account is 8.8 percent and interest is compounded quarterly, your desired periodic rate would be the quarterly interest rate so you would divide 8.8 by 4 to get 2.2 percent per quarter.

2. Divide the periodic rate expressed as a percentage by 100 to convert it to a decimal. In this example, you would divide 2.2 percent by 100 to get 0.022.

3. Add 1 to the periodic rate expressed as a decimal. In this example, you would add 1 to 0.022 to get 1.022.

4. Calculate the result from step 3 raised to the Ath power, with A being equal to the number of times accrued interest is added to the account. Raising a number to a power means multiplying it by itself a certain number of times. For example three to the fifth power equals 3*3*3*3*3. In this example, you would raise 1.022 to the fourth power to get 1.090946826.

5. Subtract 1 from the result from step 4 and multiply the result by 100 to calculate the annual percentage yield. In this example, you would subtract 1 from 1.090946826
   to get 0.090946826 and then multiply 0.090946826 by 100 to find the annual percentage yield to be about 9.09 percent.

References

• Investopedia: APR and APY: Why Your Bank Hopes You Can't Tell the Difference
• University of Arizona: Compound Interest and APY Calculator