This APY calculator is a handy tool which helps you solve for the actual interest you earn on a given investment over the course of a year. APY refers to annual interest yield and it’s a measurement which you can use to determine which is the most profitable deposit account you have or whether your investment will yield a good return.
Table of Contents
How to use the APY calculator?
This APY calculator is easy to understand and use. With it, you don’t have to solve for the APY value by hand. It’s a simple online calculator which only requires a few values for it to perform the calculation instantaneously. Here are the steps to follow for this annual percentage yield calculator:
- First, enter the percentage value of the Interest.
- Then select the Compounding option from the drop-down menu.
- Next, enter the values for the Term and choose the unit of measurement from the drop-down menu.
- Finally, enter the value of the Initial Balance.
- After entering all of these values, the APY interest calculator provides you with the value of APY and the Final Balance.
How do I calculate APY?
The annual percentage yield of APY is also known as the effective annual rate or EAR. This is a type of measurement used to come up with an estimation for the potential gain you may obtain from the investment you’re planning to take or the final balance you’d have on your deposit account.
The easiest way to do this is by using an APY calculator. If you want to make good financial decisions, you must keep in mind that the final balance in your deposit account depends on a number of aspects. You must consider the interest rate, the time period of your investment, and the kind of interest involved.
Using the APY formula, you can compare several interest rates which have varying compounding periods. This is because the annual percentage yield is a type of measurement that’s similar to compound interest. The only difference is that you express this value as a percentage.
Although it’s easier to use the annual percentage yield calculator to come up with the APY value you need, it also provides you with the value of the Final Balance. One thing to keep in mind is that APY differs from APR which means annual percentage rate.
If you need help deciding which is the most beneficial loan offer, you may need to use a different online calculator, specifically a mortgage calculator. Such a tool helps you come up with an estimation of how much money you’ll have for when you need to pay back what you’ve borrowed.
Going back to APY, the APY formula is:
APY = (1 + r/n )n – 1
r refers to the stated annual interest rate
n refers to the number of compounding periods each year
How is APY calculated per month?
APY is very useful since it considers compounding while simple “interest rates” don’t. Compounding occurs when you start earning interest on the interest which you earned previously. This also means that you earn more than the interest rate given to you.
For instance, when you deposit $1,000 in your savings account that comes with a 5% annual interest rate. By the end of the year, you would have a final amount of $1,050. But in some cases, the bank calculates and pays your interest each month.
In such a case, you would have approximately $1,051.16 at the end of the year. This means that the APY you earned is more than 5%. Although this difference doesn’t seem too significant, you’ll notice it more with bigger deposits or when you keep your money in the account for many years.
If you calculate APY per month, you will receive small additions in the amount each month. This means that as time goes by, you can a slight increase in your earnings compared to when the bank calculates APY per year.
What is a good APY rate?
Let’s say one bank offers an interest rate of 5.1% compounded annually, while another pays an interest rate of 5.0% compounded daily. In this case, which one is better? Without using an APY interest calculator or performing different calculations, it’s impossible to tell.
APY takes into account both the compounding period and the interest rate. After using the APY formula or an APY calculator, you get a value which represents the amount you can potentially earn from a given investment in a year. Therefore, there’s no way to come up with a good APY rate.
This depends on a number of factors. You may even want to determine the APR to give you a better idea of what’s best for you. Another great way to find the best option is to go to your bank and discuss both options with them. Then you can check the values they provided with the values you get on the annual percentage yield calculator.
What is the difference between APR and APY?
The easiest way for you to understand the difference between APY and APR is through a real-life example. For instance, you’re planning to purchase a brand-new car and you want to find out the best way to finance this purchase using loans.
You may go to a bank which offers a 12% APR where you would have to pay monthly interest. Also, the bank wouldn’t charge you for anything else except for the interest. This means that each month, you need to pay 1/12 of the yearly rate which is 1% each month.
If you use the same situation for APY, you will obtain a yearly rate that’s slightly different. Since APY considers the effect of compounding, you can express the yearly rate as 1.01¹² – 1 = 0.1268. Therefore, using APY, the bank charges you an interest rate of 12.68 % each year.
As you can see, the APY and APR are essentially the same things. That is if there aren’t any additional costs on your loan and you must pay the interest rate at least one time each year.