Interest rates can be expressed for any time period, including monthly interest rates and annual interest rates. When you convert from a monthly interest rate to an annual interest rate, you need to take into consideration the effects of interest compounding, so you cannot simply multiply by 12. Interest compounding refers to the effects of interest being added to the account and then generating additional interest. The annual interest rate is also known as the annual percentage yield.
Convert the interest rate into a decimal by dividing by 100. For example, if the monthly interest rate is 1.4 per cent, you get 0.014.
Add 1 to the result from step 1. For example, you would add 1 to 0.014 to get 1.014.
Raise the result from step 1 to the 12th power, because there are 12 periods per year. For example, you would raise 1.014 to the 12th to get 1.181559129. On a calculator, you would enter "1.014" then hit the exponent key, usually represented by "y^x" (the x will be in superscript), "x^y" (the y will be in superscript) or simply by "^," then enter "12" and push the equals button, denoted with "=."
Subtract 1 from the result from step 3. For example, you would subtract 1 from 1.181559129 to get 0.181559129.
Multiply the result from step 4 by 100 to find the annual interest rate expressed as a per cent. For example, you would multiply 0.181559129 by 100 to find the annual rate to be about 18.16 per cent.
You can also use the formula, APY = (1 + R)^12-1, where R is the monthly rate expressed as a decimal.
Tips and warnings
- You can also use the formula, APY = (1 + R)^12-1, where R is the monthly rate expressed as a decimal.