Annual Percentage Yield (APY)
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 bank the 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
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, your actually 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