1 / 5

Annual Percentage Yield

Annual Percentage Yield. The Annual Percentage Yield (APY) tells you how much you will earn in a year as a percentage of the investment. This is the standard way of comparing investments. APY is used to compare earnings across different time periods and with different compounding periods.

rusk
Download Presentation

Annual Percentage Yield

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Annual Percentage Yield • The Annual Percentage Yield (APY) tells you how much you will earn in a yearas a percentage of the investment. • This is the standard way of comparing investments. • APY is used to compare earnings across different time periods and with different compounding periods. • APY is different than APR (Annual Percentage Rate) because APR does not incorporate compounding within the year. • APR is what we call (r) in most of our interest equations. • For example - $100 is invested for one year at 6% compounded monthly. • b = 100(1+ .06/12)12 = $106.17 • The APR is 6%. The APY is 6.17%. • APY = (1+r/n)n -1

  2. Example less than 1 year • We learned about APY in our compound interest unit. • For example - $100 is invested for one year at 6% compounded monthly. • b = 100(1+ .06/12)12 = $106.17 • Notice that you actually earned $6.17 in one year, which is 6.17% of the amount invested. • The APR is 6%. The APY is 6.17%. • Remember “n” is the number of times per year the interest gets compounded. • In this case n=12 • APY = (1+r/n)n -1

  3. Equations for APV and CAGR • Remember “n” is the number of times per year the interest gets compounded. • APY = (1+r/n)n -1 • APY = (Ending Value/Beginning Value)n -1 • APY and CAGR are essentially the same thing • APY is typically used for short term investments • CAGR is typically used for longer term investments

  4. Another less than 1 year example • When you calculate r/n what you are doing is turning your annual rate into a rate for the time period of compounding. • A rate of 6% compounded monthly… • .06/12 = .005 means that you earn .5% each month. • If you know how much you earned over 6 months, this is a slightly different formula. • Example – you invest $100 and 6 months later your investment is worth $105. This is a 5% return. • APY = (1 + .05)2 -1= 10.25% • APY = (105/100)2 -1= 10.25% • n = # of times compounded per year. • n = 1 year / duration of investment in years.

  5. Example More Than 1 Year • You can also use APY as a benchmark for investments that last more than 1 year. • In this case it is called Compound Annual Growth Rate (CAGR) • Example – You invest $500 in stock. 10 years later the stock is worth $700. Is this a good return? • The total return is (700-500)/500 = 40%. • 40% sounds good, but is it good over 10 years. We would want to know our earnings per year. • The formula below is just like the previous example • CAGR = (1+ r)n -1 • CAGR = (Ending Value / Beginning Value)n -1 • n = 1 year / duration of investment • CAGR = (1 + .4)(1/10) – 1 = 3.42% • CAGR = (700/500).1 – 1 = 3.42%

More Related