Annualizing an interest rate means determining the rate of interest over a year based on the periodic rate. When annualizing interest rates, you can multiply the interest rate by the number of periods per year, but that calculation fails to account for the interest compounding effects. Instead, you should use a more complicated formula that includes the interest accruing on the account to get the most accurate annualized rate. If you know the periodic rate and the number of periods per year, you can calculate the annual rate.

Convert the periodic rate to a decimal by dividing by 100. For example, if the daily interest rate equals .05 percent, divide .05 by 100 to get 0.0005.

Add 1 to the periodic rate as a decimal. In this example, add 1 to 0.0005 to get 1.0005.

Raise the result to the power of the number of periods per year. For this example, because the rate is a daily rate, raise 1.0005 to the 365th power to get 1.200159411.

Subtract 1 from the result to find the annual rate expressed as a decimal. In this example, subtract 1 from 1.200159411 to get 0.200159411.

Convert the annual rate as a decimal to a percentage by multiplying by 100. Finishing the example, multiply 0.200159411 by 100 to find the annualized interest rate equals 20.02 percent.

References

- University of Arizona: Compound Interest and APY
- DePaul University: Compound Interest Formula
- Experian. "What Is APR and How Does It Affect Me?" Accessed Sept. 15, 2020.
- Inc. “Why Einstein Considered Compound Interest the Most Powerful Force in the Universe.” Accessed Sept. 15, 2020.
- Corporate Finance Institute. “What is the Compound Interest Formula?” Accessed Sept. 15, 2020.
- Corporate Finance Institute. “What is the Annual Percentage Yield?” Accessed Sept. 15, 2020.
- Office of the Comptroller of the Currency. "Truth in Lending." Accessed Sept. 15, 2020.
- American Express. "APY vs. APR: The Basics About How Interest Is Calculated." Accessed Sept. 15, 2020.

Writer Bio

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."