How To Calculate APY

Hi, my name is Graham Hobson, and I work as a finance analyst and today, I'm going to take you through some business math calculations and ratios. I calculate annual percentage yield. Annual percentage yield represents compounded interest so we - if we have an investment where we get three percent interest on it each month, across the full year, we actually will generate higher than a three percent return on it because we're getting the interest going into the account each month and getting interest on that.

So the annual percentage yield just gives us the calculation for that, for the full year. And we'll talk through an example now. Okay, so in terms of the formula, we've got the annual percentage yield equals one plus the rate divided by "N" which is a number of periods that we are getting compounded in the year multiply by "n", less one gives us the interest rate.

So the first step is to identify the number of component periods in the year and the rate. So in this example, we're going to compound coarsely, so therefore N=4, or say if you do it in a month it would equal twelve, and the rate for this example is going to be six percent. So you're just going to follow the formula through so fist we're going to calculate the r divided by the element, simply zero point zero six divided by four.

Then go, let's do the next section of that which is where we add one to it, which is that quite simple so that plus one. N needs to put it to the power component period so we said earlier that "N" was 4, so therefore, we need to put it to the power of four so we've got one point zero two to the power of four gives us one point zero six. The final bit of the equation was to take one away from this figure, simply that, less one and that's the equation complete so as a percentage element, we've got a six point one four percent.

So the original rate was six percent per month, but an annual percentage yield we actually get a six point one four percent which shows the impact of the compounded interest. .