Formula for Calculating the APY on Bonds
Savings bonds compound interest semiannually.
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The annual percentage yield, or APY, takes into account the compounding effects of interest calculated from the annual percentage rate, or APR, which is the simple interest rate. APY is also called the effective interest rate, because it is the rate you effectively receive over the span of a year. Some bonds make regularly scheduled coupon payments based on the APR. For these bonds, interest earned is not reinvested, so the APY equals the APR. However, bonds that retain interest until a maturity date compound that interest. If the compounding period is not an annual one, the APY and APR differ.
Divide the bond's APR or coupon rate by the number of compounding periods in a year. As an example, a U.S. Savings Bond compounds semiannually. If it offers a 6 percent APR, divide 6 by 2 to calculate a periodic interest rate of 3 percent.
Step 2Divide this figure by 100 to convert it to decimal format. Continuing with the example, divide 3 percent by 100 to get 0.03.
Step 3Add one to the result. In the example, add 1 to 0.03 to get 1.03.
Step 4Raise the result to the power of the number of compounding periods. Continuing with the example, raise 1.03 to the 2nd power to get 1.0609.
Step 5Subtract 1 from the result to calculate the APY in decimal format. In the example, 1.0609 minus 1 leaves you with an APY of 0.0609.
Step 6Multiply by 100 to convert the decimal APY to percentage format. In the example, 0.0609 times 100 gives you an APY of 6.09 percent.
References
Tips
- The entire formula for calculating bond APR is:
- APY = (1+APR/n)^n - 1
- Where "n" is the number of compounding periods in a year, and APY and APR are expressed as decimal figures.
Writer Bio
C. Taylor embarked on a professional writing career in 2009 and frequently writes about technology, science, business, finance, martial arts and the great outdoors. He writes for both online and offline publications, including the Journal of Asian Martial Arts, Samsung, Radio Shack, Motley Fool, Chron, Synonym and more. He received a Master of Science degree in wildlife biology from Clemson University and a Bachelor of Arts in biological sciences at College of Charleston. He also holds minors in statistics, physics and visual arts.