The Annual Percentage

Yield (APY) also known as the Nominal Interest Rate, Annual Interest Rate or

Annual Percentage Rate (APR) can simply be defined as the actual annual

rate of return taking into consideration the compounding interest over the

period of time. Mathematically APY can be computed via the mathematical formula

shown below

BREAKING DOWN ‘Annual Percentage Yield – APY’

When considering loans instead of investment, total

borrowing cost including fees as a single percentage number then the APY is

analogous in nature to the Annual Percentage Rate (APR). Both are synonymously

used a consistent measures for the interest rates, nonetheless contrasting to

the APR equation, the equation for APY does not contemplate account fees, it only

contemplates on the compounding periods. Its effectiveness also lies in its

ability to normalise changeable interest-rate agreements into an annualized

percentage number.

APY vs. Rate of Return

In an investment situation, when an investment grows over a specific

period of time the scenario is considered as the rate of return. This can be

expressed by way of percentage of the real investment amount inputted from the

original start off.

Rates of return can be difficult to compare across different investment

vehicles, especially when such vehicles feature different compounding periods.

For case in point, one investment can compounds its interest monthly, while

another compounds can quarterly, or even another compound can yield biannually

and lastly, some compounds interest rate can only once per annum.

Comparing these margins by simply redefining each value per year

yields inaccurate results, as it ignores the effects of interest rates fills.

The shorter the integration period, the faster the investment is, since the end

of each combined period, the interest earned in the period is added to the

principal, and future interest is charged to the principal.

Calculate

APY

For

example, if you are considering whether to invest year bond year coupon payment

of a 6% market when due or paid income to pay 0.5% monthly interest rate of

monthly.

At first glance, it seems the output equal to 12 months

multiplied by 0.5% equals 6%. However, when the effect of the compound is

calculated by calculating the APY, the second investment actually brings

Investment

6% divided by 365, at a cumulative daily interest, which has a higher APY. This

is because the basic balance where the interest rate increases daily, instead

of once a month or once a year.