Annual Percentage Yield (APY)
Determine the effective annual interest rate taking into consideration the effect of compounding.
The stated annual interest rate without considering compounding.
How many times per year interest is added to the balance.
Effective Annual Yield (APY)
6.168%
Compounding Benefit
Your effective yield is 0.168% higher than the nominal rate due to 12 compounding periods.
Nominal APR
6.00%
Effective APY
6.168%
APY allows you to compare different deposit products with different compounding frequencies on an "apples-to-apples" basis.
Financial Tip
When borrowing money, look for the lowest APR. When saving money, look for the highest APY. Always check how frequently your SACCO or Bank compounds interest!
Annual Percentage Yield Formula
The Annual Percentage Yield (APY), referenced as the effective annual rate in finance, is the rate of interest that is earned when taking into consideration the effect of compounding.
There are various terms used when compounding is not considered, including nominal interest rate, stated annual interest rate, and annual percentage rate (APR).
Key Components
- r
Stated Interest Rate
The nominal rate shown by the bank (e.g., 6%).
- n
Compounding Periods
The number of times the institution compounds per year (e.g., 12 for monthly).
Calculation Example
An account states that its rate is 6% compounded monthly.
Formula Applied:
(1 + 0.06/12)^12 - 1
Comparing Rates
Compounding more frequently increases your APY. A 6% rate compounded daily will result in a higher yield than the same rate compounded monthly. Always use APY for true comparisons.