Calculate the effective Annual Percentage Yield (APY) from a nominal interest rate and compounding frequency, and see the interest earned on a deposit over one year.
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APY = (1 + r/n)^n − 1, where r is the nominal annual interest rate (also called APR) as a decimal, and n is the number of times interest compounds per year. APY reflects the true effective annual return once compounding is factored in, and will always be equal to or greater than the nominal rate whenever compounding happens more than once a year.
For example, a nominal rate of 5% compounded monthly produces an APY of about 5.12%, slightly higher than 5% because interest earned each month starts earning its own interest for the rest of the year.
APR (Annual Percentage Rate) is the nominal, stated interest rate before compounding is applied. APY (Annual Percentage Yield) is the effective rate you actually earn (on savings and deposit accounts) or pay (on some loans) once compounding is taken into account. Banks are generally required to advertise APY on savings products since it reflects the true return more accurately than APR alone.
Comparing a bank's advertised APY directly against a loan's advertised APR as if they measure the same thing, APY is the effective post-compounding yield, APR is typically the nominal pre-compounding rate.
Assuming a higher compounding frequency always makes a meaningfully bigger difference, in practice the gap between monthly and daily compounding at typical savings rates is usually just a few hundredths of a percent.
Forgetting that APY quoted by a bank can change over time on variable-rate accounts, the number entered here is only accurate for the rate in effect right now.
Because APY accounts for compounding, interest earned during the year starts earning its own interest before the year is over. The more frequently interest compounds, the bigger this effect, and the higher APY is relative to the nominal rate.
No, it's optional. Leave it at 0 if you only want the APY percentage; enter an amount to also see the actual interest earned on that deposit over one year.
Yes, when interest compounds only once a year, APY and the nominal rate (APR) are exactly the same, since there's no additional compounding within the year to create a difference.
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