A money market account is a special type of checking or savings account available at most retail banking institutions that offers a higher-than-normal interest rate in exchange for requiring larger-than-normal deposits. APY -- Annual Percentage Yield, also known as Effective Annual Rate -- is a number that represents the return on your investment over a year, taking into account your money market account's interest rate and the number of times that interest will be compounded over that year.
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Determine the interest rate for your money market account. Most banks will publish this information. Express this interest rate as a decimal. For example, assume that the interest rate for a money market account is 3.5 percent, which expressed as a decimal is 0.035.
Determine the number of time per year interest compounds in the money market account. Most banks publish this information. Continuing with the same example, assume that interest compounds two times per year.
Solve (1 + r/n )ˆ(n) – 1, where r is the interest rate and n is the number of times per year the interest compounds. Continuing with the same example, APY is equal to (1 + 0.035/2 )ˆ(2) – 1 = 0.035306, which, expressed as a percent, is 3.5306 percent.
- To convert a percent to a decimal, divide the percent by 100. To convert a decimal to a percentage, multiply the decimal by 100.
- When inquiring about the terms of a money market account, a bank usually quotes you either the account's APY or its Annual Percentage Rate, depending on which term is most favorable to the bank. Be aware that these terms are not interchangeable and mean two different things. APR is the account's interest rate without compounding interest; APY is the total interest per year, taking into account compounded interest.
- Deposits.org: Money Market Account
- Free Online Financial Calculators: APY Calculator to Calculate Effective Annual Rate
- Depositaccounts.com: Understanding Interest Rates and APY
- Making Money Work: Making Money Work by Understanding Annual Percentage Yielf
- Fiscalwealth.com: APY vs. APR
- Syracuse University Center for Support of Teaching and Learning: Review of Percents
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