Annual percentage yield (APY), measures the effective interest rate on an account after accounting for interest compounding. When you compare money market accounts, you may see the annual interest rate, but this does not tell the whole story. The more often the bank compounds the interest on the money market, the higher the effective rate. By calculating the APY on each money market account, you can figure out which one will pay you the most interest.
1. Divide the annual interest rate on the money market account by the times each year the money market account compounds interest. For example, if the money market account pays an annual interest rate of 3.36 percent and compounds interest monthly, divide 0.036 by 12 to get 0.003.
2. Add 1 to the periodic rate on the money market account. In this example, add 1 to 0.003 to get 1.003.
3. Raise the sum of 1 and the money market periodic rate to the power of the number of times interest compounds each year on the money market account. In this example, since interest compounds 12 times per year, raise 1.003 to the 12th power, which is the same thing as multiplying 1.003 by itself 12 times, to get 1.03659998.
4. Take away 1 from the result to find the money market APY as a rate. Continuing the example, take away 1 from 1.03659998 to get 0.03659998.
5. Multiply the APY as a rate by 100 to change the APY to a percent. Completing this example, multiply 0.03659998 by 100 to get an APY of about 3.66 percent.
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