How to Annualize Interest Rates

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Annualizing an interest rate means determining the rate of interest over a year based on the periodic rate. When annualizing interest rates, you can multiply the interest rate by the number of periods per year, but that calculation fails to account for the interest compounding effects. Instead, you should use a more complicated formula that includes the interest accruing on the account to get the most accurate annualized rate. If you know the periodic rate and the number of periods per year, you can calculate the annual rate.

Things You'll Need

  • Calculator
  • Convert the periodic rate to a decimal by dividing by 100. For example, if the daily interest rate equals .05 percent, divide .05 by 100 to get 0.0005.

  • Add 1 to the periodic rate as a decimal. In this example, add 1 to 0.0005 to get 1.0005.

  • Raise the result to the power of the number of periods per year. For this example, because the rate is a daily rate, raise 1.0005 to the 365th power to get 1.200159411.

  • Subtract 1 from the result to find the annual rate expressed as a decimal. In this example, subtract 1 from 1.200159411 to get 0.200159411.

  • Convert the annual rate as a decimal to a percentage by multiplying by 100. Finishing the example, multiply 0.200159411 by 100 to find the annualized interest rate equals 20.02 percent.

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