Business, Legal & Accounting Glossary
The rate of return on an investment for a one-year period. For an interest-bearing deposit account, such as a savings account, APY is equal to one plus the periodic rate (expressed as a decimal) raised to the number of periods in one year. This value is then subtracted by one. Due to compounding, the APY will be greater than the periodic interest rate multiplied by the number of periods in the year.
Whether you are borrowing money to make a large purchase or depositing your money in a financial institution so you can make money (e.g., savings account, certificate of deposit), you will need a basic understanding of some key financial terms: annual percentage rate, annual percentage yield, and finance charges.
The Annual Percentage Yield is the annual rate of interest plus the effect of compounding on the interest earned. This is the number quoted when banks and other financial institutions try to get you to deposit money in savings accounts or buy certificates of deposit.
In these cases, you are the lender, so the higher the APY, the more money you will make from amounts on deposit.
Compound Interest Formula For Interest Paid Once a Year
A = P X (1+APR)Y
The annual percentage yield (APY) is the actual percentage by which a balance increases in one year. It is sometimes also called the effective yield or simply the yield.
APY = relative increase = absolute increase / Starting principal
The annual percentage yield was good because it was actually a return on the investment that we had made recently.
You should do your best to correctly calculate the annual percentage yield so that you know what to expect from it.
The annual percentage yield of the CDs offered by my bank is slightly greater than the nominal rate given interest is paid monthly and compounded throughout the year.
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This glossary post was last updated: 5th November, 2021 | 3 Views.