Calculation of Annual Percentage Yield

Calculation of Annual Percentage Yield

Annual percentage yield is a method to calculate earning on deposits and the yield is calculated for the lender. APY is similar to Annual percentage rate that is used in loans interest calculations but the Annual percentage rate is paid by the borrower to the bank and you can get APY from a bank on your money. APY is a method by which your money grows.

APY is a standard way to compare benefits on investments. In many countries the formula used to calculate the APY is controlled by a government agency. APY is higher for frequent compounding periods like your money is compounded daily, quarterly, half year or yearly. Different banks provide different APY for deposits and you can select the highest paying bank to get better returns.

You can benefit from APY by picking APY that pays interest frequently and you may not require waiting for maturity to get the benefit from the APY. As you get the interest you can reinvest your money into better APY and get better returns.

The general excel formula to calculate an APY is

APY = POWER ((1+ (A1/B1)), B1)-1

Where,
A1 is the rate
B1 is compounding frequency.

APY calculations are based on effective interest rate formula but many changes are made into the final calculations based on local laws. There are various calculations followed by banks on interest bearing deposits account to calculate APY. Generally APY is the rate earned in one year time period depending on compounding; the process of adding the saving accounts earnings to the principle amount.

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