# APY Calculator

APY Calculator is a tool which enables you to calculate the actual interest earned on an investment over a year. Annual interest yield (APY) is a measurement that can be used to check which deposit account is the most profitable, or whether an investment will yield a good return. You can also use it in reverse; you can find the interest rate with a given compound frequency if you know what the annual percentage yield is. Also, just for your convenience, we let you play with actual amounts - pick the initial balance and the time in which you'd like to get the final balance (or, as usual, do it in reverse!), and our calculator will return the results immediately. The APY calculator may also save you from miscalculation. That's why this application is useful both for fledgling entrepreneurs and rabid investors.

Keep reading to find out:

- What is APY?
- How does the APY calculator work?
- How to calculate annual percentage yield.

## What is APY?

APY stands for annual percentage yield, otherwise called effective annual rate (EAR). This measurement is used to estimate the potential gain from an investment or the final balance in a deposit account. In order to make smart financial decisions, you have to remember that the final balance depends on a range of aspects. You have to take into consideration not only the interest rate, but also the period of time you are going to invest your money for and the kind of interest (whether it's simple or compound).

With annual percentage yield you can compare a number of interest rates which have different compounding periods. This is because APY is a measurement similar to compound interest but expressed in percentages. While you can always use the compound interest calculator in order to check the final balance of your investment, the APY calculator will estimate its annual percentage gain.

Remember that APY is not the same as APR. The latter stands for annual percentage rate and is normally associated with loans and mortgages. Provided you don't invest money, but borrow it, the formula is quite similar. In order to help you decide which loan offer is the most beneficial, you can use our mortgage calculator. This tool helps you estimate the amount of money you'll have to pay back.

## How does this APY calculator work?

This APY calculator bases its calculations on two values - interest and compound frequency. Thanks to the variety of options in the second box, you can compare a number of offers which have different compounding periods.

For example, you have the following offers:

- Interest rate of 1% compounded yearly,
`APY = 1%`

- Interest rate of 0,7% compounded quarterly,
`APY = 0,702%`

- Interest rate of 0,5% compounded daily,
`APY = 0,501%`

Now, the only thing you have to remember is that the higher the APY value is, the better the offer. By calculating APY, you can see that the first of the exemplary offers pays the most.

## How to calculate annual percentage yield

The calculation of the annual percentage yield is based on the following equation:

`APY = (1 + r/n )`

^{n – 1}

where:

- r - the interest rate
- n - the number of times the interest is compounded per year

As you have already learned what APY is, you can use this formula to calculate the annual percentage yield by yourself. However, it would be tedious to make all these calculations for each offer you want to consider. A much easier and time-saving solution is to use our APY calculator.

All you need to do is:

- Type the interest rate, e.g. 2%
- Determine compound frequency, e.g. half-yearly

The calculator will then count the APY. In this case it amounts to 2,01%.

If you want to make the inverse calculation, you can also use the savings calculator. This tool helps you estimate how much you'll save or how much you need to deposit if you have a certain amount as your goal.

## Difference between APR and APY

The best way to understand the difference between the APR and APY is to consider a real-world example. Let's imagine that you are about to buy a car and you are looking for the best way to finance it with loans. You go to a bank which offers you an APR of 12% with interest to be paid monthly (the bank doesn't charge you any other cost besides the interest). It means that in every month you need to pay one-twelfth of the annual rate, which is `12 / 12 = 1%`

in a month. If we translate this scheme into APY, we get a slightly different yearly rate. As APY takes into account the effect of the compounding factor, the yearly rate is expressed as `1.01¹² - 1 = 0.1268`

. So, according to APY, the bank is charging you 12.68 % interest yearly.

So, as we hope you can see, the annual percentage rate (APY) and the APR (or effective annual rate) are the same if there are no additional cost on the loan and you need to pay the interest once a year.