How to Calculate APR Earned on an Investment

Credit cards typically quote APR, but their true, compounded rate is the APY.

Credit cards typically quote APR, but their true, compounded rate is the APY.

While investing in your future, there's two terms you should know. Annual percentage rate, or APR, defines the rate of return or interest rate without including the effects of compounding. This differs from the annual percentage yield, or APY, which does include compounding effects. That is, the interest also earns interest. Credit card companies often quote the APR, because is lower than the APY on accounts compounded monthly. Calculating the APR earned on your investment allows comparison with advertised APR from banks and investment brokers, and it properly calculates the annual return for investments paying simple, non-compounding interest.

Tally the returns for a certain period of time. As an example, if a CD produced two quarterly payments of $12.50, adding both payments produces a periodic return of $25.

Divide the periodic return by your original investment to calculate the periodic rate of return. If you paid $1,000 for the example's CD, divide $25 by $1,000 to calculate a periodic rate of 0.025, or 2.5 percent.

Calculate the fraction of a year that the period entails. This might mean dividing the number of months by 12, dividing the number of days by 365 or the number of quarters by 4. Because the example spans two quarters, divide 2 by 4 to calculate 0.5 years. This calculation works even if the time period is larger than one year.

Divide the periodic rate by the fraction of a year to calculate APR. In the example, divide 0.025 by 0.5 to calculate an APR of 0.05, or 5 percent.


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