What is APY (Annual Percentage Yield)?

Annual Percentage Yield (APY) is the real rate of return earned on an investment or savings deposit, taking into account the effect of compounding interest. Unlike the simple Annual Percentage Rate (APR), APY reflects the total amount of interest you will earn in a year, including the interest earned on your interest (compounding).

APY provides a more accurate way to compare different savings accounts, certificates of deposit (CDs), or other interest-bearing accounts, especially when they have different compounding frequencies. The more frequently interest is compounded (e.g., daily vs. annually), the higher the APY will be compared to the stated APR.

How Does This APY Calculator Work?

This calculator uses the standard formula to determine APY based on your inputs:

• Initial Deposit: The starting amount of money you deposit. While needed to calculate the final balance and interest, the APY percentage itself doesn't depend on the principal amount.
• Nominal Annual Interest Rate (%): This is the stated interest rate (often the APR) before considering compounding. Enter it as a percentage (e.g., 4.5 for 4.5%).
• Compounding Frequency: How often the earned interest is added back to the principal. More frequent compounding (like daily) results in a higher APY than less frequent compounding (like annually) for the same nominal rate.

The calculation follows these steps:

1. Converts the annual interest rate percentage to a decimal (r = rate / 100).
2. Uses the selected compounding frequency to determine the number of periods per year (n).
3. Calculates APY using the formula: APY = (1 + r/n)n - 1.
4. Calculates the final balance after one year using the compound interest formula: Balance = Principal * (1 + r/n)n*1.
5. Calculates the total interest earned in that year: Interest = Balance - Principal.
6. Formats the results (APY as a percentage, balance/interest as currency).

Frequently Asked Questions (FAQs)

• What's the difference between APY and APR?
  APR (Annual Percentage Rate) is the simple annual interest rate *without* taking compounding into account. APY (Annual Percentage Yield) *includes* the effect of compounding within the year. APY gives you a truer picture of your actual earnings, especially when comparing accounts with different compounding periods. APY will always be equal to or higher than the APR.
• Why is APY important?
  APY allows for an accurate comparison between different savings or investment options. An account with a slightly lower APR but more frequent compounding might actually have a higher APY (and thus earn you more money) than an account with a slightly higher APR compounded less often.
• How does compounding frequency affect APY?
  The more frequently interest is compounded (daily > monthly > quarterly > annually), the more often your earned interest starts earning its own interest. This results in a higher APY for the same nominal annual rate.
• Does this calculator account for taxes or fees?
  No, this calculator shows the gross APY and interest earned *before* any potential taxes on interest income or account fees are considered. Your actual net return may be lower.
• Can I calculate APY for more than one year?
  APY itself is an *annualized* rate, representing the yield over a single year. While this calculator shows the balance after one year, you would use a standard compound interest calculator (often requiring a 'Term' input) to find the balance over multiple years.
• Is this APY calculator free?
  Yes, this tool is completely free for estimating Annual Percentage Yield.