Formula
APY assumes the interest stays invested for a full year:
APY = (1 + nominal rate / compounds per year) ^ compounds per year − 1
The earnings line applies that yield once to the deposit. It does not add extra contributions.
Assumptions
- The nominal rate is fixed for the year.
- Interest compounds exactly as often as selected.
- No fees are subtracted.
Worked example
A 5% rate compounded monthly has an APY of 5.116%. On $10,000.00, one year earns $511.62.
Input definitions
- Nominal rate
- The stated annual rate before compounding is considered.
- APY
- The effective yearly yield if interest is reinvested at the selected frequency.
Limitations
A bank may use a daily balance and a 365- or 360-day year. This formula uses equal compound periods and does not model a promotional rate that expires.
Questions
Why is APY higher than the nominal rate?
When interest is added more than once a year, later periods earn interest on earlier interest.
Is APY the same as APR?
No. APR is a stated annual rate. APY shows the effective yield after compounding.