Question 1

What is the difference between APR and APY

Accepted Answer

APR (Annual Percentage Rate) is the simple annual interest rate without compounding. APY (Annual Percentage Yield) includes the effect of compounding. APY is always higher than APR for the same nominal rate, except when compounded annually (then they're equal).

Question 2

How do I calculate APY from APR

Accepted Answer

Use the formula: APY = (1 + r/n)^n - 1, where r is the APR (as decimal) and n is the number of compounding periods per year. For example, 5% APR compounded monthly: APY = (1 + 0.05/12)^12 - 1 = 5.12%.

Question 3

Why is APY higher than APR

Accepted Answer

APY accounts for compound interest (earning interest on interest), while APR is simple interest. The more frequently interest compounds, the larger the gap between APY and APR. Daily compounding yields the highest APY.

Question 4

What compounding frequency gives the highest APY

Accepted Answer

Daily compounding typically gives the highest APY for practical purposes. Continuous compounding is the theoretical maximum but yields nearly identical results to daily compounding (difference less than 0.001%).

Question 5

Should I choose an account based on APY or APR

Accepted Answer

Always compare APY for savings and investment accounts—it shows the true return. For loans, APR shows the stated rate but APY shows the true cost including compounding. APY is always more accurate for comparison.

Question 6

How does inflation affect APY

Accepted Answer

Inflation reduces your real return. Real APY ≈ Nominal APY - Inflation Rate. For example, 5% APY with 3% inflation = 2% real return. Your money grows 5% nominally but purchasing power only increases 2%.

Question 7

What is a good APY for savings accounts

Accepted Answer

As of 2025, 4-5% APY on high-yield savings accounts is competitive. Traditional banks typically offer 0.01-0.1% APY, while online banks offer 4-5%. Always compare APY, not APR, when choosing savings accounts.

Question 8

Do credit cards use APY or APR

Accepted Answer

Credit cards advertise APR but effectively charge APY through daily compounding. For example, 18% APR compounded daily equals 19.7% APY. This means you pay more than the stated APR suggests.

Question 9

How do fees affect effective APY

Accepted Answer

Fees reduce effective APY. A $10 monthly fee on a $10,000 balance effectively reduces APY by 1.2% ($120/year ÷ $10,000). A 4% APY account with $10/month fee effectively earns 2.8%.

Question 10

What is continuous compounding APY

Accepted Answer

Continuous compounding assumes interest compounds constantly (not at discrete intervals). The formula is APY = e^r - 1, where e is Euler's number (2.71828). For 5% APR: APY = e^0.05 - 1 = 5.127%.

Question 11

How does tax impact APY

Accepted Answer

Taxes reduce after-tax APY. After-tax APY = Before-tax APY × (1 - Tax Rate). For example, 5% APY in a 25% tax bracket = 5% × 0.75 = 3.75% after-tax APY. Municipal bonds are tax-free and maintain full APY.

Question 12

What is the difference between stated APY and effective APY

Accepted Answer

Stated APY is the published rate. Effective APY includes fees, compounding frequency, and other factors that affect actual returns. Always ask about fees that could reduce effective APY below the stated rate.

Practice Examples

Question 13

Example 1: APR to APY Conversion

Accepted Answer

Problem:

APR: 7%
Compounded: Monthly

Solution:

APY = (1 + 0.07/12)^12 - 1
APY = (1.00583)^12 - 1
APY = 1.0723 - 1
APY = 7.23%

APY is 0.23% higher than APR

Question 14

Example 2: Investment Comparison

Accepted Answer

Problem:

Bank A: 4.5% APR, daily compounding
Bank B: 4.6% APR, monthly compounding
Which is better?

Solution:

Bank A:
APY = (1 + 0.045/365)^365 - 1
APY = 4.60%

Bank B:
APY = (1 + 0.046/12)^12 - 1
APY = 4.70%

Bank B wins (4.70% vs. 4.60%)

Question 15

Example 3: Credit Card True Cost

Accepted Answer

Problem:

Credit Card APR: 20%
Balance: $5,000
What is true annual cost with daily compounding?

Solution:

APY = (1 + 0.20/365)^365 - 1
APY = 1.2213 - 1
APY = 22.13%

True annual cost: 22.13%, not 20%
Annual interest: $5,000 × 0.2213 = $1,107

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Need Help? Our APY calculator is perfect for comparing savings accounts, investments, and understanding the true cost of loans. Calculate APY now and make informed financial decisions!

Disclaimer: APY calculator provides estimates based on inputs. Actual APY may vary based on financial institution policies, fees, and compounding methods. Consult financial institutions for accurate rates.

APY Calculator - Calculate Annual Percentage Yield

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