1. What is APY?

APY (Annual Percentage Yield) is the real rate of return earned on a savings account when compounding interest is taken into account. Unlike simple interest rate, APY reflects the actual amount you'll earn over a year.

2. How Does the Calculator Work?

The calculator uses the APY formula:

Where:

• \( r \) — Annual interest rate (in decimal form)
• \( n \) — Number of compounding periods per year

Explanation: The formula accounts for the effect of compounding, where interest is earned on previously accumulated interest.

3. Importance of APY Calculation

Details: APY allows you to compare different savings accounts accurately, as it standardizes the comparison by accounting for different compounding frequencies.

4. Using the Calculator

Tips: Enter the annual interest rate (as a percentage) and the number of times interest is compounded per year (typically 12 for monthly compounding).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY does. APY gives a more accurate picture of earnings.

Q2: How often do high-yield savings accounts compound?
A: Most compound daily, but some may compound monthly or quarterly. Daily compounding typically yields slightly higher APY.

Q3: Does a higher APY always mean better?
A: Generally yes, but also consider factors like minimum balance requirements, fees, and account accessibility.

Q4: How much difference does compounding frequency make?
A: More frequent compounding increases APY. For example, 2% interest compounded daily yields 2.02% APY vs 2.01% for monthly.

Q5: Is APY guaranteed?
A: For savings accounts, yes (unless the bank changes rates). For investments, returns can vary.