How to Convert APR to APY - Tutorial

How to Convert Annual Percentage Rate to Annual Percentage Yield - Definition, Formula and Example

Definition:

Annual Percentage Yield (APY) refers to the effective interest rate which is paid on an investment over the given period time based on the annual percentage rate. Annual Percentage Rate (APR) is the interest rate charged on the amount borrowed and it replicates the annual cost of borrowing money.

Formula:

Periodic Rate = APR / n APY = (1+Periodic Rate)n - 1
Where,
n = Number of Periods APY = Annual Percentage Yield APR = Annual Percentage Rate

Example :

John borrowed 7% interest rate on his investment for 12 months then, what will be the John's Annual Percentage Yield?

Given :

APR = 7% = 0.07 Number of Period (n) = 12 months

Solution :

Periodic Rate = APR / n = 0.07 / 12 Periodic Rate = 0.005833333 APY = (1+Periodic Rate)n - 1 = (1+0.005833333)12 - 1 = 1.072290077 - 1 = 0.072290077 APY = 7.229 %

Result :

Annual Percentage Yield is 7.229 %

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