Deductions of credit risks through APY
It is the risk that a counter party to a transaction will fail to perform according to the terms and the conditions of the contract, thus causing the holder of the claim to suffer a loss. This main reason for the risks is because of the poor understanding of the financial transactions that occur between the customer and the banker.
One of the tools to reduce the risks is through calculating the APY (Annual percentage yield). It is a tool for evaluating how much a deposit earns you, and it is a standardized way of comparing investments. Your job as a consumer is to put your money where it will get the highest APY. APY , amount you earn on a deposit over an year. It refers to your earnings how much money you are making on the investment that you have made. Because we all want our money to work for us and grow, it is important to get a good Annual percentage yield through the bank. APY is notable because it takes compounding into account., Compounding means making earnings on your earnings.
This means that the quoted APY is telling how much you are really making on the money. In general, you will find that the Annual percentage yield is higher for more frequent compounding periods. Ask your financial institution how often they compound. If your money is compounded daily as opposed to quarterly, you’ll be able to earn a better APY. Don’t think of one compounded daily investment as separate from your checking account – they all go together and should be considered one. Think of yourself as the Chief Financial Officer of You. To make up your personal Annual percentage yield, find ways to make sure that your money is compounding as frequently as possible. If two compound daily investments pay the same interest rate, pick the one that pays out interest monthly instead of at maturity. Then, you can reinvest your interest payments and start earning interest on that payment. Even we can increase our investments by calculating the Annual planning yield and by making proper planning where we have to invest your money, which can yield us much more profit.
Calculating an investment’s APY can be tricky. If you want to just find out what an APY is with Excel, here’s the function:
=POWER((1+(A1/B1)),B1)-1 where A1 is the Rate and B1 is compounding frequency.
Try pasting this formula into any cell on a spreadsheet (except A1 or B1). In cell A1 you will put the stated annual interest rate – in decimal format. For example, if the stated annual rate is 6%, you’ll type “.06” in cell A1. Then, you put the number of times you’ll compound each year. For example, for daily compounding you would enter “365” (or 360 depending on the institution) in cell B1. In the example I’ve used, you’ll find that the Annual percentage yield is 6.183%. In other words, if you get 6% annually with daily compounding, your APY = 6.183. Try changing the compounding frequency and you’ll get an idea of how the APY changes.
For example, you might show quarterly compounding (4 times per year) or the unfortunate 1 payment per year (which just results in a 6% APY). Thus this is an efficient way of cutting short the problem of credit risk.
