APY Calculator (Effective Rate)
Turn a nominal rate and compounding frequency into the real annual yield.
Result
APY (%)
6.168
Interest in 1 year
61,678
How it works
The effective annual rate answers a simple question a nominal rate cannot: what do I actually earn over a year once compounding is counted? The formula is APY = (1 + rate/n)^n − 1, where n is the number of compounding periods. A nominal 12% compounded monthly is not 12%: each month adds 1%, and those additions themselves earn interest, so the year ends at (1.01)^12 − 1 ≈ 12.68%. The gap widens with the rate and with the frequency — quarterly, monthly and daily compounding all yield slightly more than the last. This is why the effective rate is the only fair basis for comparison. Two accounts advertising the same nominal rate can pay measurably different amounts, and a loan quoted monthly costs more than the headline suggests. Always compare effective to effective, never nominal to effective.
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Frequently asked questions
APY vs nominal rate?
The nominal rate ignores compounding; APY includes it, so APY is always equal to or higher.
Why does frequency matter?
Compounding monthly beats annually because earlier interest itself starts earning interest.
Why do regulators require the effective rate to be shown?
Because nominal rates hide compounding and are not comparable between products. Many jurisdictions require an effective figure — APY on savings, APR on credit — precisely so consumers can line offers up on one axis.
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