Interest rates can be quantified in a number of ways depending on how often interest compounded. The APR or annual percentage rate, represents the annual interest rate as calculated by multiplying the number of periods per year by the periodic rate, and does not take into consideration the effects of interest compounding. The APY does take into consideration interest compounding. The more times per year interest is compounded, the higher the APY will be.
Multiply the annual interest rate expressed as a decimal by 1/365 to calculate the daily interest rate. For example, if your annual interest rate was 3.65 percent, you would multiply 0.0365 by 1/365 to get 0.0001.
Add 1 to the result from step 1. In this example, you would add 1 to 0.0001 and get a result of 1.0001.
Raise the result from step 2 to the 365th power because there are 365 interest compounding periods if interest is compounded on a daily basis over the course of one year. Continuing the example, you would raise 1.0001 to the 365th power and get a result of 1.037172411.
Subtract 1 from the result from step 3 to find the APY expressed as decimal. In this example, you would take away 1 from 1.037172411 to get a result of 0.037172411.
Multiply the APY expressed as a decimal from step 4 by 100 to find the APY expressed as a percentage. Finishing this example, you would multiply 0.037172411 by 100 to find the APY is about 3.72 percent.
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