The annual percentage yield (APY) is only one of the pieces of information that is required to be disclosed by a financial institution or broker when a consumer invests or saves in an interest-bearing account; this is part of the Truth in Savings Act. Although this information is supplied to you, you may feel the need to do your own calculations to insure that you understand how the interest you are earning is being compounded. If you prefer to use an online calculator, Bankrate.com offers a compound interest calculator (see resources).
Determine the annual interest rate of your investment. Whether you are investing in a savings bond or through a private investor, contact the appropriate party to find out what your interest rate is and any circumstances that may cause the rate to change after a certain amount of time.
Divide your annual interest rate by the number of times you will compound in one year. For instance, if you are compounding monthly, divide by 12; if you are compounding daily, divide by 365. If you have an annual interest rate of 6 percent and compound monthly, you divide 12 into .06 and end up with 0.005. Add one to this figure to come up with 1.005. If you are compounding daily, you divide 365 into .06 and add one for a result of 1.000164.
Calculate 1.005 to the 12th power since you are compounding 12 times per year. The resulting figure is 1.06167. If you are compounding at a daily rate, you calculate 1.000164 to the 365th power for a resulting figure of 1.06183.
Subtract one and convert into percentage form. 1.06167 minus one is equal to .06167; convert this into the form of a percent and you have an APY of 6.167 percent. Your APY is 6.183 percent if you are compounding daily.
- Jupiterimages/Photos.com/Getty Images
- What Is a Mortgage Reset?
- Things to Know About Car Loans
- How do I Calculate Car Loan Payments & Interest Rate?
- How to Calculate Interest Rate Payments
- How Is Daily Periodic Interest Rate Calculated?
- How to Calculate the Effective Interest Rate for Discounted Bonds
- How to Calculate EPS Growth Rate
- How do I Calculate Forex Rollover Rates?
- How to Calculate What You're Willing to Pay if the Interest Rate Drops on a Bond
- How to Estimate Electrical Bills