APY = (1 + r/n)n - 1
r = interest rate (or stated interest rate)
n = number of times interest compounds
(for example - if monthly then n = 12 // if semi-annually, n = 2 // if quarterly, n = 4)
What is Annual Percentage Yield?Annual Percentage Yield (APY) is the earned rate of interest when taking into consideration how the interst is compounded. In finance APY is referred to as Effective Annual Rate of Return. It is important to note that APY is not the same as APR (Annual Percentage Rate). APR does not take into consideration the effect of interest compounding.
A bank offers an interest rate of 4% compounding monthly. Given this, the rate (r) is .04 and because interest compounds monthly then n is 12 (there are 12 months in a year... just to articulate). Please note that we would say 4% is .04, but for the calculator on this page you would enter just a 4 because the script converts it to .04 as part of the calculation.
Based on the formula, the problem would look like the following:
APY = (1 + .04/12)12 - 1and the solution to this problem is APY = 4.0472%.