Annual percentage yield is the effective annual rate of return that an investment provides. It can be different from the apparent rate of interest due to the compounding effect.
The annual percentage yield can be calculated using the following formula:
Annual percentage yield = ((1+i)n – 1) / n
For example, a bank offers an interest of 5% compounded annually for depositing $10,000 for 8 years. The annual percentage yield will be as follows.
Annual percentage yield = ((1+5%)8 – 1)/8 = 5.968%
In other words, with the effective rate of return per year is 5.968% that is 0.968% higher than the apparent rate of return of 5% per year.
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