How do I Calculate APY From Interest Rate?

by Akeia Dixon, Demand Media
    The interest rate is needed to calculate the APY.

    The interest rate is needed to calculate the APY.

    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).

    Step 1

    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.

    Step 2

    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.

    Step 3

    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.

    Step 4

    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.

    About the Author

    Akeia Dixon is a freelance writer who began her professional writing career in 2009 for various websites. She enjoys writing about natural health topics but also loves to research and write about her findings on any subject. She is currently in school studying psychology and sociology.

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