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APY or Annual Percentage Yield, is a metric used to express the annual rate of return on an investment, taking into account the effect of compounding interest. APY is often used in savings accounts, certificates of deposit, and other interest-bearing financial products. In this article, we'll show how to calculate APY, discuss its importance, and suggest strategies for improvement.
Here's the APY formula:
APY = (1 + Interest Rate / Number of Compounding Periods) ^ Number of Compounding Periods - 1
Let's consider a real-world example of a high-yield savings account offered by a bank. We'll use the following data to calculate the APY:
To calculate, plug in the numbers into the APY formula:
APY = (1 + Interest Rate / Number of Compounding Periods) ^ Number of Compounding Periods - 1
APY = (1 + 0.025 / 12) ^ 12 - 1
APY ≈ 0.0253
Convert the APY back into a percentage:
APY = 0.0253 x 100 = 2.53%
In this example, the APY of the high-yield savings account is approximately 2.53%.
Understanding APY is important for several reasons:
Here are some strategies that can help increase your APY:
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