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Make Your Money Work for You

By Bill G. Page
Contributing Writer

CBN.com Understand annual percentage yield and get a better return on your investment.

Annual percentage yield (APY) is the actual percentage increase over a one-year period and provides a means for comparing differing compound interest rates.

The formula for APY is:
APY = (1 + R/N) ^ (N) – 1

Where:
APY  = annual percentage yield
R       = Interest Rate expressed as a decimal (e.g. 2.5% = 0.025)
N       = Number of compounding periods per year

Annual percentage yield gives you the rate of return on an investment for a one-year period. For example, please note the following annual percentage yields on an investment returning a 2.37% interest rate at various compounding periods:


Period

Number Of Compounding Periods Per Year

Annual Percentage Yield (APY)

Annual

1

APY = (1+ .0237/1) ^ (1) - 1 = .023700 = 2.3700%

Semi-Annual

2

APY = (1+ .0237/2) ^ (2) - 1 = .023840 = 2.3840%

Quarterly

4

APY = (1 + .0237/4) ^ (4) - 1 = .023911 = 2.3911%

Monthly

12

APY = (1 + .0237/12) ^ (12) - 1 = .023959 = 2.3959%

Daily

365

APY = (1 + .0237/365) ^ (365) - 1 = .023982 = 2.3982%


Note that an investment with a 2.37% interest rate compounding one time per year (Annually) has an Annual Percentage Yield of 2.37%. An investment with a 2.37% interest rate compounding 365 times per year (Daily) has an Annual Percentage Yield of 2.3982%.

Annual Percentage Yield is a better comparison for your investments than merely comparing interest rates alone. The more frequent the compound periods per year, the more money you make. “Daily” compounding generates more money than “monthly” compounding which generates more money than “quarterly” compounding which generates more money than “semi-annual” compounding which generates more money than “annual” compounding.

You can compare money market rates, annual percentage yield, and minimum deposits at www.bankrate.com.

Money can make a good servant; but it always makes a terrible master. "No servant can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money”—Luke 16:13 (NIV).

I have a book/CD ROM called Making Money Work: A Christian Guide For Personal Finance (www.MakingMoneyWork.us). It explains many personal finance concepts, such as annual percentage yield. The book comes with a CD ROM that has calculators to help you analyze, plan, and achieve your financial goals. It includes a calculator to help you quickly determine annual percentage yields.

This article is adapted from Making Money Work: A Christian Guide For Personal Finance with permission of Willie Glenn Page, Inc. © 2005.

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