Understanding the different terms used to describe interest rates can be confusing at first.

Using APR and APY calculations to compare various investments and the real cost of a purchase requires that you understand what each of these terms mean, and how interest is calculated and compounded. It simply means the amount of interest that will be paid on an investment you make; or the amount charged on a loan per year.

It may seem that this is all you need to know and when looking at deposit products that pay simple interest, it pretty much is. Interest rates get slightly more confusing to calculate and make sense of when there is compounding involved.

Simple interest is just that and is typically used with savings bonds. This will happen every year for the length savings bond term. Instead, we want to leave the interest earned in the account and let it grow over time. When the interest earnings are left in the account, the balance of your money grows and the interest is calculated on that total balance.

In the previous example, interest was paid on the investment once per year, which means it has an annual compounding period. In this case the APY and interest rate paid on the investment are identical. However, most banks offer more frequent compounding periods. Common values are quarterly, monthly, weekly or even daily. The reason is the same compounding effect that happened each year in the previous example, also starts to happen on a much smaller scale with more frequent compounding periods, which results in better returns.

It may seem like a small difference but this adds up over time.

How to Calculate Daily Interest on a Savings Account | eHow

What if one bank is offering 5. How do you know which one is better? This is where the APY comes in handy.

APY stands for annual percentage yield. It takes into account the interest rate and compounding period to give you a single number that represents how much you will earn from that investment in one year. APY is similar to APR or Annual Percentage Rate.

The difference is APY is used with deposit accounts where you are earning the interest and APR is used to describe the rate you pay on loans. APR also factors in loan fees that must be paid, which is not applicable in APY calculations for deposit accounts.

Some accounts pay different rates based on how much you have invested, known as tiered rates. This is known as a blended APY. Banks that offer blended APYs typically list the rate for the higher tier as a range. This can make it difficult to compare rates between banks.

A Formula for Calculating APR and APY

Is this account better or worse than one that pays 3. It depends on how much you have invested. To calculate the blended APY you use the formula. Blog Forum Banks Savings Accounts Checking Accounts CD Rates Money Market IRA Rates.

What You Need to Know About Zelle, the New Player in Peer-to-Peer Payments Partnering Up with LendingTree! For Top Rates, Can Credit Unions Compete? How to Keep Thieves From Taking Over Your Bank Account. Blog Understanding Interest Rate and APY Understanding Interest Rate and APY Comments 28 Post a Comment. Sort by Date Sort by Votes. I've passed actuarial exams, and I think you have done an exceptional job of explaining this very clearly for the unexperienced folks out there.

Thanks for the info but I do it the lazy way. I find most banks have the interest rate and the APY posted or can give it to me over the phone. Then all I have to do is run them both on my handy calculator and find out the difference and make my decision on which one I will go with. Understanding these terms are not only helpful for profesional knowledge, but they will also be great for personal use. When a bank or credit union lists their dividend or interest rate the same as the APY, what does that mean exactly?

Would I only receive 0.

APY Interest Calculator | Calculate APY Rate | Bank of Internet USA

How much it decreases the interest APY? If you buy a CD with a 5 year term paying 1. The apy fluctuates a little depending upon those terms.

Ask the issuer of the CD for underlined items. I think everyone should put their money in their mattress, if they can't come up with better rates than are now out there. Banks forget, its our money they use to finance their business.

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