How to Calculate APY on an Investment

The APY of an investment provides you with a comprehensive measure of the interest it will generate.

The APY of an investment provides you with a comprehensive measure of the interest it will generate.

When choosing an investment, it can be a real challenge to decide which financial product offers you the best deal. It is particularly confusing when you deal with investments where interest is compounded several times a year. In these cases you receive interest on your interest and the total interest on your initial investment is higher than your nominal interest rate. A useful tool to help you know the overall interest you will receive is the annual percentage yield, or APY, of an investment, which accounts for the effects of compound interest on an account.

Ask your investment provider what your annual interest rate is. Ask how many times a year the interest rate will be applied to your account.

Write down the formula for annual percentage yield: APY=((1+r/n)^n)-1. In this formula, "r" stands for interest; and "n" stands for the amount of times your interest is compounded in a year. For example, if you receive interest on the balance of your investment every month, your "n" number would be 12. The symbol "^" means you have to multiply the previous term by itself "n" amount of times. For example, the term 2^4 is the same as writing 2 x 2 x 2 x 2.

Insert the information of your investment into the formula and solve the resulting equation. For instance, if your interest rate is 5 percent and your account is compounded monthly, your equation would look like this: APY =((1+5/12)^12)-1 and the solution would be 5.12 percent.

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About the Author

Andrew Latham has worked as a professional copywriter since 2005 and is the owner of LanguageVox, a Spanish and English language services provider. His work has been published in "Property News" and on the San Francisco Chronicle's website, SFGate. Latham holds a Bachelor of Science in English and a diploma in linguistics from Open University.

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