About this calculator
The APY Calculator enables you to calculate the actual interest earned on an investment over a year.
What is APY?
APY is the abbreviation of Annual Percentage Yield. It is a standardized method of expressing the amount of money that an investment or a deposit account will earn in one year, not only the stated interest rate but also the impact of compounding, that is, the interest on interest. Where a bank it is promoting a nominal interest rate (also known as an APR or interest rate), the APY informs you of the effective annual interest rate which you will actually gain provided you leave your money in the account and there are no further deposits or withdrawals.
APY is important as compounding alters the results. A 5% nominal interest rate can be advertised by two accounts, one which compounds annually and another which compounds monthly but by year end, the latter will yield a greater return. APY eliminates this confusion, but it achieves this by reducing various compounding schedules to one similar number: the percentage rate that you could have gotten in a given year.
Difference between APR and APY
APR ( Annual Percentage Rate ) and APY ( Annual Percentage Yield ), both represent an annual rate, but they represent two different things, and should be compared on different things. In other words, APR informs you how much it costs to borrow money every year (or the nominal rate of interest on a loan) whereas APY informs you what your money actually earns you every year after taking into consideration the effect of compounding.
When to use APR vs APY
Compare savings, deposit and investment accounts using APY which is the real annual yield after compounding. Compare loans and credit opportunities with APR since APR is a standardized method to demonstrate the cost of borrowing money and typically contains some fees; effective interest cost following compounding and amortization schedule, which should also be considered on loans. In a word, APY questions itself on the amount of money I will get in one year. APR responds to the question of which is the quoted annual price (and, frequently, the standard cost that incorporates fees) of lending.
What is the difference between APY and interest rate?
The difference between an interest rate and APY is on the issue of compounding. The interest rate, or nominal rate, is simply a percentage expressed in a simple manner by which the bank or lender charges you to gain or pay in the course of a year, without considering the frequency with which the interest is compounded with your balance. Instead, APY or Annual Percentage Yield is the rate of return you are actually going to get annually when compounding is considered, i.e. when the interest you earn begins to earn its own interest over the year. To take things into perspective, a savings account with an interest rate of 5 percent and a month-to-month compound rate will effectively have a marginal interest of a little more than 5 percent in one year since the interest on each month will add up to the interest on future years. This is because APY is a better depiction of true growth of savings and investment accounts. Interest rate by itself is handy when studying the simple conditions of an account or loan, but fails to provide the actual yield when there is some compounding. APY enables the leveling of the playing field between consumers and different compounding schedules, and thus, makes them make informed choices. Although interest rates represent the nominal figure, APY shows how much money you will actually earn or pay in a year and it is, therefore, the most viable number to use when comparing savings accounts, as well as CDs, or other interest bearing products. It should be remembered that APY presupposes that the balance of the account will spend the entire year and nothing will be withdrawn, so the real amount earned may fluctuate as money will be withdrawn or a fee will be charged.