How Percentage is Being Calculated

How percentage is being calculated

Percentage yield is nothing but the compound rate of interest calculated against any kind of investments in terms of percentage against the simple numerical value. Normally, it is calculated over a year known as the annual percentage yield (APY) but can also be calculated over months or any suitable time period. But, what is the actual fact that it carries with it? It helps consumers to assess the quality of the related products. But one should never confuse it with a similar term known as annual percentage rate (APR). The difference between them is quite simple yet sometimes a bit confusing.

Annual percentage yield (APY) is simply the interest paid by a financial institute to its depositor or lender. But the reverse is true for the annual percentage rate (APR), i.e., it is the interest that is paid by a borrower to the financial institution from which it has taken credit. It is a convention followed by the financial institution to represent their profits in terms of the annual percentage yield (APY) instead of annual interest rate (APR). This is because the APY exhibit a higher amount of return on investments rather than the APR.

There is also a mathematical definition for the annual percentage yield (APY) through which its can be calculated. It is as follows:

APY = (1 + inom/N)N – 1

Where, inom ? nominal interest rate
N ? number of compounding periods/year

But the formula not always yields the desired result as it highly depends on the local statutes of the place. The definition of the annual percentage yield (APY) could also vary according to the rules and regulations of the concerned authorities of a particular government and they can change its definition according to their needs.