How is APY Calculated
How is Upfund's APY (Annual Percentage Yield) calculated?
APY is computed based on how long it takes to return the money, and how much it earns in that time, extrapolated over a year. Because each loan has multiple payments, each payment essentially will have it's own separate APY. We then combine all the APYs to compute the total APY on the entire investment.
Below is a mathematical explanation with an example, of how it works. Proceed with caution :)
For example, let's say that a campaign is paying back 5% ROI, and returns the investment over 3.5 months
The wrong way:
If you took the first, easy way out, you'd assume the APY for such a deal should be (5% * (12/3.5)) = ~17%. The problem is though, this assumes the entire loan is being paid back after 3.5 months, which is not the case. The loan is paid back in chunks, starting at 2 months.
The right way
In the first 1.5 months, there are no payments.
At the 2 month mark (60 days later), the first payment is made, which is 10% of the principal. For this partial sum, the APY is computed as follows:
p1 = 5% / 60 * 365 = 30% APY
==> This means that the first payment, which happens at the 60 day mark, has an APY of 30%.
At the 2.5 months mark (75 days later), the second payment is made, 30% of the principal. For this partial sum, the APY is computed as follows:
p2 = 5% / 75 * 365 = 24% APY
==> This means that the second payment, which happens at the 75 day mark, has an APY of 24%.
At the 3 month mark (90 days later), the 3rd payment is made, another 30% of the principal. For this partial sum, the APY is computed as follows:
p3 = 5% / 90 * 365 = 20% APY
==> This means that the first payment, which happens at the 90 day mark, has an APY of 20%.
At the 3.5 month mark, the last payment is made, 35% of the principal. For this partial sum, the APY is computed as follows:
p4 = 5% / 105 * 365 = 17% APY
The final APY is then calculated using a weighted average:
(p1 * 10 + p2 * 30 + p3 * 30 + p4* 35) / 105 = 22% APY