Annual percentage yield

The annual percentage yield provides a means for estimating the return on an investment with compound interest in terms of its effective annual yield.

To find the APY, one uses the following formula:

$\mathrm {APY} ={\frac {1}{t}}\left(\left(1+{\frac {r}{n}}\right)^{nt}-1\right)$

where $n$ is the number of compounding periods per year, $t$ is the number of years and $r$ is the rate.

For example, an investment compounded quarterly at 3% interest for 2 years will have an APY of:

$\mathrm {APY} ={\frac {1}{2}}\left(\left(1+{\frac {.03}{4}}\right)^{(4)(2)}-1\right)\approx .0308$

or an APY of 3.08%

$100 invested under the above terms would generate $3.08 in interest the first year. If the interest is deposited and continues to grow with the principal, then the account would earn $3.17 in the second year because $0.08 interest would be earned on first year's interest.

Banking

In the United States, banks are required to state the APY of their deposit accounts in all advertisements. The purpose is to be able to clearly compare deposit products between institutions. APY calculations for advertisement purposes generally assume that interest paid will be compounded into the account. Depositors which receive monthly checks for the interest earned will achieve a lower real rate of return because the moneys being compounded will be reduced monthly.

External links

• APY on Investopedia