How to Calculate Annual Percentage Yield on a Daily Balance

APY, annual percentage yield, matters only for accounts earning compound interest.

Annual percentage yield looks at an interest rate on an account that earns compound interest to determine how much interest, as a percent, you will earn during the year. The reason you cannot use the actual interest rate is this does not factor in compounding. Compounding allows you to earn interest on interest previously earned, so your annual percentage yield will always be higher than your interest rate on the account.

Instructions

1. Determine your interest rate and how often it compounds. For example, assume your account earned 4 percent interest that compounds 12 times a year, or once a month.

2. Divide your interest rate by the number of times it compounds, then add 1 to the value. This is your interest rate per compounding period plus the principal of the account. In the example, 4 percent divided by 12 equals 0.00333. Then, 1 plus 0.00333 equals 1.00333.

3. Raise the amount calculated from the previous step to the power of the number of times your account compounds. Raising to the power means using exponents. In the example, 1.00333^12 equals 1.0407. This is your annual interest plus your principal. By using 12 as the exponent, you are multiplying 1.00333 by itself 12 times.

4. Subtract 1 from your annual interest plus your principle to calculate your annual percentage yield. In the example, 1.0407 minus 1 equals 0.0407. Then by multiplying it by 100, you get 4.07 percent as your APY.

References

• University of Arizona: Compound Interest and APY Calculations