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How to calculate APY
To calculate APY, you’ll need to know your interest rate (e.g. 2%) as well as the compound frequency (how often the interest is calculated for snowballing, e.g. monthly or quarterly).
The formula looks like this:
- r = Annual interest rate (as decimal)
- n = the number of times your product calculates compound interest in a year (e.g. 12 for monthly, or 4 for quarterly).
Looks a bit complicated? No worries.
When comparing financial products, it’s good to get your figures right. That’s why we’ve created this quick and useful APY calculator, which you can use to work out the APY for different savings and investments. You can adjust all the necessary rates to see what your actual, end-of-year interest will be on that risotto. Sorry, on the financial product.
And the outcome? Well, if it's an investment, the higher the APY number, the better.
What is APY?
APY stands for ‘annual percentage yield’, sometimes also known as ‘annual interest yield' or the ‘effective annual rate’. When it comes to savings and investments, the APY is the actual amount of interest earned in a year. It takes into account the impact of compounding to give an accurate figure for the year’s interest.
Calculating the APY of a financial product is therefore useful for determining its profitability, and comparing it against other investment options.
What is the difference between APY and nominal interest rate?
The nominal interest rate is also called the base rate of a product. It’s the basic, advertised-everywhere, not-including-compounding, number-on-the-tin rate. The APY rate is the figure that includes compounding. You can enter either within our calculator (indeed, our calculator will work out the APY rate for you, if you enter the nominal rate).
Think of the nominal interest rate as a bag of dry rice, with the calories listed on the packaging. The nominal interest rate is not a lie, just as the calorie information is not a lie, but you aren’t going to eat that rice plain, just as your savings and investments won’t exist in a vacuum. So the actual calories consumed / interest earned will depend on the conditions you’re cooking in: whether that’s butter, cream and parmesan cheese hiking the calorie count way up, or interest compounding which snowballs the amount of actual interest earned on a product.
Continuing this analogy, then, the APY is like checking the calories on a risotto where the restaurant lists this on the menu. (Morally, let’s set aside the concept of calories on menus, or putting cream in risotto.) It’s a calculation of the actual, finished, compounded, end-of-year interest amount. The cooked, compounded risotto.
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