What is the difference between the interest rate and the annual percentage yield?
Interest rate and annual percentage yield (APY) are two different things, although they are related terms. When you open a savings account, you often get both numbers, usually expressed as a percentage. The bank usually emphasizes APY above the interest rate. This is often a higher percentage, which means that the account provides greater interest than the interest rate.
The arrival at the interest rate is a very simple equation. Let's say the bank offers 10% annual interest on the savings account. If you disrupt $ 1,000 (USD) to a bank account at the beginning of the year, then common sense and easy mathematics would dictate that you would have USD 1100 at the end of the year. This is accurate only, if the interest is compounded during the year. In most cases, however, interest is enhanced every week, daily or monthly. When interest is more often combined, the annual percentage yield is higher.
For example, if your interest is composed monthly, you should add one twelve 10% to your total account or about 0.83% interest each month. In the first month you would earnI $ 8.30. Next month, when your interest is again enhanced, you would have $ 1008.30 to be used by a monthly rate. So you would add about $ 8.34 to the total balance. The more often the interest in complicated, the higher the APY happens as it has progressed. If you left your money untouched for a year, by the end of the year APY would be 10.471%and you would have $ 1104.71. If the interest was composed daily, APY would be 10.516%.
The APY calculation formula is based on the interest rate and the number of annual interest in the composition. The following formula is used where x = the number of times is composed and r = quoted interest rate:
(1 + R ÷ x)
in the language, APY is 1 plus the interest rate divided by the number of times, which is composed annually and increased to the number of times annually. This total part then deducted from him to derive APY. It is a complicated formula and there are a number of APY calculators unless you have access to a scientific calculator.
You want to -i to get the best nAbout your investment, look for APY rates that are higher than interest rates. Remember that the frequency of compound interest will increase rates. If possible, you want to find accounts that fold daily because these produce the highest yield. Also keep in mind that APY is complicated if you withdraw money from your account. APY rates assume that you leave the money to sit for a year without touching it. If you reduce your savings account balance, you will reduce your income per year.