Home
Back
APY Formula:
| From: | To: |
The APY (Annual Percentage Yield) formula calculates the real rate of return earned on an investment, taking into account the effect of compounding interest. It provides a more accurate representation of actual earnings than the nominal interest rate.
The calculator uses the APY formula:
Where:
Explanation: The formula accounts for compound interest by calculating how interest earned in each period adds to the principal and earns additional interest in subsequent periods.
Details: APY is crucial for comparing different investment options because it standardizes the comparison of returns regardless of compounding frequency. It helps investors make informed decisions about where to place their money for optimal returns.
Tips: Enter the nominal interest rate as a percentage (e.g., 5 for 5%), and the number of compounding periods per year (e.g., 12 for monthly compounding). All values must be valid (rate ≥ 0, compounding periods ≥ 1).
Q1: What is the difference between APR and APY?
A: APR (Annual Percentage Rate) does not account for compounding, while APY does. APY provides a more accurate measure of actual earnings.
Q2: How does compounding frequency affect APY?
A: More frequent compounding results in higher APY for the same nominal rate, as interest is calculated and added to the principal more often.
Q3: What are typical APY ranges for CDs?
A: CD APY rates typically range from 0.5% to 5% depending on the term length, amount invested, and current market conditions.
Q4: Is APY the same as effective annual rate?
A: Yes, APY is essentially the same as the effective annual rate (EAR) and represents the actual annual return on an investment.
Q5: Can APY be negative?
A: While rare, APY can be negative if the investment loses value, though most CDs are insured and guarantee principal protection.