Convert a nominal rate (APR) into the effective annual rate (APY) for a given compounding frequency. Enter the rate and frequency.
Usage Tip
When a rate is advertised, check whether it is APR or APY and how often it compounds — that determines what you actually earn or pay.
n = compounding periods per year
They are equal only when interest compounds once a year.
Daily compounding gives a slightly higher APY than monthly, but the gap is small.
To compare a loan and an investment fairly, put both on the same basis.
The nominal rate, often called APR, is the stated yearly rate before compounding is taken into account. The effective annual rate, or APY, is what you actually earn or pay over a year once interest is added to the balance and then earns interest itself. The more often interest compounds, the higher the effective rate is for the same nominal rate.
The conversion is one plus the nominal rate divided by the number of compounding periods, raised to the number of periods, minus one. A 12 percent nominal rate compounded monthly gives an effective rate of about 12.68 percent, and compounded daily about 12.75 percent. When comparing savings accounts or loans, compare effective rates rather than nominal ones, since the compounding frequency can differ.