How to Calculate APY on an Investment

by Mark Kennan

An annual percentage yield (APY), measures the compound annual growth rate of an investment. However, dividing the total percentage gain by the number of years you held the investment doesn't account for compound interest. Instead, you have to use a more complicated formula to get an accurate rate of return. APY can be useful for comparing investments that have different holding periods and different investment amounts.

1. Divide the maturity value of the investment by your initial investment. For example, if you invested $10,000 and your investment matured at $13,900 after five years, divide $13,900 by $10,000 to get 1.39.

2. Divide 1 by the number of years the investment took to mature. In the example from the previous step, divide 1 by 5 to get 0.2.

3. Raise the Step 1 result to the power of Step 3 with a scientific calculator. Power means to use exponents. On a calculator, enter the Step 1 result, press the power key (typically "^" or "x^y"), enter the Step 3 result and push enter. In this example, raise 1.39 to the 0.2 power to get approximately 1.068

4. Subtract 1 to find the result to find the APY on the investment. In this example, subtract 1 from 1.068 to find the APY equals 0.068, or about 6.8 percent.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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