What is APY?
APY (Annual Percentage Yield) is a standardized way to measure the annual return on an investment that factors in the effect of compound interest. Unlike simple interest calculations, APY accounts for how often the interest is compounded during the year, giving you a more accurate picture of your actual returns.
When to Use an APY Calculator
An APY calculator helps you understand the true earning potential of your investments in the following situations:
- Comparing different savings accounts or certificates of deposit (CDs) with different compounding periods
- Planning for long-term investments and understanding how compound interest will grow your money over time
- Evaluating the real returns on fixed-income investments when interest compounds multiple times per year
How to Calculate APY
The formula to calculate APY is:
APY = (1 + r/n)n - 1
Where:
- r = Annual interest rate (decimal)
- n = Number of compounding periods per year
To calculate the final amount after a certain term:
Final Amount = P × (1 + r/n)n×t
Where:
- P = Principal (initial investment)
- r = Annual interest rate (decimal)
- n = Number of compounding periods per year
- t = Term in years
The total interest earned is:
Total Interest = Final Amount - Principal
Common Compounding Frequencies
Compounding Frequency | Number of Times Per Year (n) |
---|---|
Daily | 365 |
Weekly | 52 |
Monthly | 12 |
Quarterly | 4 |
Semi-annually | 2 |
Annually | 1 |
Examples
Example 1: Calculating APY for a Savings Account
What is the APY for a savings account that offers 2% annual interest rate, compounded monthly?
Annual Interest Rate | 2% |
Compounding Frequency | Monthly (12 times per year) |
APY | 2.02% |
Example 2: Calculating Final Amount and Total Interest
If you invest $10,000 at 5% annual interest compounded quarterly for 3 years, what will be the final amount and total interest earned?
Principal | $10,000 |
Annual Interest Rate | 5% |
Compounding Frequency | Quarterly (4 times per year) |
Term | 3 years |
APY | 5.09% |
Final Amount | $11,616.17 |
Total Interest | $1,616.17 |
Example 3: Comparing Different Compounding Frequencies
How does the APY differ for a $5,000 investment at 3% annual interest rate with different compounding frequencies over 5 years?
Compounding Frequency | APY | Final Amount |
---|---|---|
Annually (1 time) | 3.00% | $5,796.37 |
Semi-annually (2 times) | 3.02% | $5,803.89 |
Quarterly (4 times) | 3.03% | $5,807.77 |
Monthly (12 times) | 3.04% | $5,810.58 |
Daily (365 times) | 3.05% | $5,812.82 |