What is Annual Percentage Yield (APY)?
APY = (1 + (i / n))n - 1
i = the stated annual interest rate
n = the number of compounding periods in one year
How Does Annual Percentage Yield (APY) Work?
For example, let's assume you buy a certificate deposit with a 12% stated annual interest rate. If the bankthe interest every month (that is, 12 times per year), then using this information and the formula above, the APY on the CD is:
(1 + (0.12 / 12))12 - 1 = 0.12683 or 12.683%
Let's look at it from another angle. Let's assume you$1,000 into the 12% CD. Over 12 months, the look like this:
The percentage change from $1,000 to $1,126.83 is ($1,126.83 - $1,000) / $1,000 = 0.12683 or 12.683%. Even though the bank has advertised a 12% interest rate, youractually grew by 12.683%.
Why Does Annual Percentage Yield (APY) Matter?
APY takes loan.into consideration and is thus almost always higher than the stated annual interest rate. It is a useful tool for evaluating the true return on an or the true interest rate paid on a