How to Calculate APY for a Money Market

A money market account that compounds interest more frequently has a higher APY.
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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.

Step 1

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.

Step 2

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.

Step 3

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.

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