How to Calculate APY - Tutorial

How to Calculate Annual Percentage Yield - Definition, Formula, Example

Definition:

Annual Percentage Yield is a standardized illustration of annual interest rate in finance, depending on the compounding time of one year.

Formula:

APY = (1 + r/n)n - 1
Where,
APY = Annual Percentage Yield r = stated annual interest rate n = number of compounding periods per year

Example :

A man got loan from the bank with a 5% stated annual interest rate. The bank compounds the interest for 8 months. Calculate the annual percentage yield.

Given,

Interest rate (r) = 5% = 0.05 Number of compounding periods (n) = 8

To Find,

APY

Solution:

APY = (1 + r/n)n - 1 = (1 + (0.05 / 8))8 - 1 = (1 + 0.00625)8 - 1 = 1.006258 - 1 = 1.0511 - 1 = 0.0511 = 5.11 %

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