Annual Percent Yield (APY)
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Annual Percent Yield Calculator
The term “power of compounding” is familiar for investment enthusiasts. It is the way to make our hard-earned money work hard for us to bring in exponential gains over the long term. Annual Percent Yield is one of the metrics one must understand to decode the power of compounding.
Join us on our online Annual Percent Yield Calculator page as we demystify the power of compounding. We explain how to calculate annual percent yield along with how money works in compound interest.
What is the Annual Percent Yield(APY)?
Annual Percent Yield, also termed as ‘annual interest yield' or the ‘effective annual rate is the actual interest you would earn if your investment were to be compounded.
The difference between simple interest and annual percent interest is:
- Simple interest is calculated on the amount of the investment for a given tenure.
- Annual Percent Yield is calculated on the amount of the investment plus the interest it makes in a given tenure.
The formula for calculating Annual Percent Yield is A = I(1 + r/n)n*y -1.
The final amount that you would receive invested in the APY plan would be: A = I(1 + r/n)n*y
where:A = Final amount
I = Initial Investment
r = period rate
n = number of compounding periods per year (for ex: n=2, if compounding interest is half-yearly)
y = tenure in years
Let us understand APY calculation with an example:
Say you want to invest $2,000. You can choose to put it in simple interest or compound interest as per the investment plans your bank offers.
Assume the interest is 6% - for both the plans with simple interest and compound interest.
Now, the plan that works on simple interest will give you $2120 at the end of one year.The plan with compound interest will give you $2,123.36 at the end of the year, compounded monthly.
If the difference seems small for one year, let us understand the power of compounding in the long run.
The same $2000 will give $3200 after 10 years on simple interest, while you get $3638.79 on the same investment compounded monthly for 10 years.
Well, isn’t the difference clear? You can calculate the APY using our online APY calculator and make fruitful investment decisions.
How to gain higher returns using APY?
Banks offer various investment schemes based on interest calculations. Traditional savings schemes, money market accounts, and certificates of deposit are some of such investment plans. They may vary from bank to bank, although the principle of calculation adheres to the Central Financial Authority such as the Reserve Bank or Federal Reserve.
You can check with various banks about the APY percentage and use our online free APY calculator to understand your returns for varying durations.
FAQs about APY
I have heard the term APR. Are APR and APY both same?
Both are different. APR stands for Annual Percentage Rate. It implies the interest you would pay when you take a loan such as an educational loan, housing loan, etc. It impacts your credit score too.
On the other hand, APY stands for Annual Percent Yield and tells you how your money can grow over time by leveraging the power of compounding. APY indicates how much banks would add to your investment at the end of the tenure.
What factors should I consider when investing in an APY plan?
Various factors given below can impact APY. Choose the best APY plan by consulting your financial advisor.
- Nature of the bank: Online or Traditional
- Membership with the parent bank/union.
- The type of account
- The nature of the account – flat or tiered
- Amount of the investment
- Savings balance
- Nature of interest – temporary or permanent
What is a blended APY?
Blended APYs vary from bank to bank. In blended APYs, the rate of interest varies with the slab.
For instance, if the APY is 5% till $15000, and 6% over $15000.
Say you invested $16000. Some banks calculate APY for the whole $16000 as 5% for the first $15000 and then 6% for the remaining $1000.
In case their blended APY is 4.5%, then the calculation is done at the rate of 4.5%, over the whole $16000.
To avoid confusion while choosing such blended plans to make the right pick, in addition to your financial advisor’s guidance, our online APY calculator comes in handy.
Building financial security with compound interest
Most of us choose safe ways of investment to avoid market risks. Savings schemes that come with simple interest are the foremost choice for many of us. They deliver nominal returns at the end of every year and guarantee the safety of the investment.
Investing in safe investment plans that come with the benefit of compound interest is a proven way to gain more returns in the long run. It is a fabulous way to put your ideal money to use and earn from it in the long run.
No wonder, successful millionaires always vouched on the power of compound interest. They always envisioned the future value of the money and made their investments in the plans that come with the power of compounding. Quoting Albert Einstein in this context: “Compound Interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t, pays it.”
Our APY calculator helps in clearing your compound interest calculations. Often a simple confusion such as choosing between 5.5% compounded monthly or 5.5% compounded annually can make or break our investment choices. To avoid such confusion in calculations, we designed our APY calculator in a user-friendly way.
Enter your investment in the chosen denomination, the interest rates your bank offers, the type of compounding, and the tenure of the investment. There you go! You can see how much amount you would receive at the end of the investment. You can make as many calculations and comparisons of plans of various banks and decide which one benefits you the most.
Happy earnings with the power of compounding! Happy financial calculations with our wide range of finance calculators!