Bond Yield Calculator – Converting APR into APY

October 25th, 2012 by

The bond yield calculator converts APR into APY, which allows you to better compare two different bonds.  Information about interest earned on investments is sometimes given in one of two ways. The first is in terms of the annual percentage interest rate, or APR. The second is the annual percentage yield – the APY. The APY includes an effect of compounding interest that the APR does not, and for that reason the APY is always higher than the APR. It’s important therefore to be able to compare like with like, and this is where the Yield calculator can help.

 

How do you use the Bond Yield Calculator?

You’ll need to put in the following information so that the bond yield calculator can then display the figure for the APY:

Annual Interest Rate: This is for entering the APR. For example, if the APR is 3.4%, then enter 3.4

Number Of Compounding Periods: The assumption is that the total period concerned is one year. So if you enter 365, this means that interest is compounded daily; 12 would mean monthly, 4 would mean quarterly, and so on. By changing the number of periods you’ll also see that the more frequently the interest is compounded (more compounding periods in the year), the more the APY (the result given by the bond yield calculator) increases as well.

Annual Effective Interest Rate: When you’ve entered in the data above into the bond yield calculator and clicked on “Calculate”, this is the result. You’ll see the APY that corresponds to the APR and the frequency at which the interest is compounded.

What are the limitations of the Yield Calculator?

The bond yield calculator only works in one direction, from APR to APY. What happens if you want to calculate in the opposite direction meaning you want to find out what the APR is by first starting with the APY? You’ll have to make an initial estimate of the APR, see how close it gets you to the APY that you already have and then repeat the process until you home in on the right APR figure.

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