- [Voiceover] Financial institutions usually advertise
the interest rates their products return to investors.
Most ads list an Annual Percentage Rate which you can use
to calculate the yearly return
using the Compound Interest Formula.
Some ads however, list an Annual Percentage Yield
which is the net return
and not the actual interest rate applied to the investment.
When you're comparing two or more investment opportunities,
you must make sure that all the investment's terms
are expressed using the same type of interest rate.
That is APR or APY.
In this movie, I will show you how to convert
between APR and APY using two functions.
The sample file I will use is called
NominalAndEffective_01_05 and that is an Excel Workbook
you can find in the Chapter One folder
of the Exercise Files collection.
The two functions you will use,
and they're hinted at by the file name,
are Effective and Nominal.
Let's say that you have a product that is being advertised
at an APY, or effective rate, of five cents.
You see that product listed here in columns A and B.
If you want to convert from the Annual Percentage Yield,
or effective rate, to the nominal rate, or APR,
then you can use the following formula.
I'll click on cell B8 and I'll type equal
and I'll use the Nominal function.
So I've got my APY of five percent, so I'll type Nominal.
Then type a left parenthesis and I have my effective rate
and my number of periods.
My effective rate, or Annual Percentage Yield,
is in cell B5.
Then I'll type a comma and I need to enter
in the number of periods per year.
That is in cell B6, so I have 12 periods per year.
Right parenthesis and Return
and you see that I have an APR of 4.89% which is
the equivalent APR for and APY of 5% compounded monthly.
And you can see the future value of this investment
based on the APR that I calculated.
Now we can do the same thing to calculate an effective rate,
or Annual Percentage Yield, based on an APR.
See my APR and periods per year here in cells E5 and E6.
To calculate the Annual Percentage Yield,
I'll click on cell E8 and then type equal
and the function I want to use is Effective, or Effect.
So you can see that I have a nominal rate and the number
of periods which is the same as what we were looking for
when we calculated a nominal rate.
So I'll click cell E5 for the nominal rate, then a comma,
and the number of periods per year is 12.
That's in cell E6.
Right parenthesis and Return
and we have an Annual Percentage Yield of 5.12%.
You can see that the future value is here.
The difference between 5% Annual Percentage Yield and 5%
Annual Percentage Rate can be fairly significant over time,
so always make sure when you're evaluating an investment
which type of interest rate you've been quoted.