1. What is APY?

APY (Annual Percentage Yield) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Unlike simple interest, APY considers that interest is earned on previously accumulated interest.

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 shows how more frequent compounding leads to higher effective yields, as interest is earned on interest more often.

3. Importance of APY Calculation

Details: APY allows investors to compare different CD and savings account offers accurately, as it standardizes the comparison regardless of compounding frequency.

4. Using the Calculator

Tips: Enter the annual interest rate (as a percentage) and the number of times interest compounds per year (e.g., 12 for monthly, 4 for quarterly).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR doesn't account for compounding, while APY does. APY gives the true annual rate of return.

Q2: How does compounding frequency affect APY?
A: More frequent compounding (daily vs. monthly) results in higher APY for the same nominal rate.

Q3: What's a good APY for CDs?
A: As of 2023, top high-yield CDs offer 4-5% APY, but rates vary with market conditions.

Q4: Does APY account for fees?
A: No, APY calculations don't consider account fees which may reduce actual returns.

Q5: Is APY the same as effective annual rate (EAR)?
A: Yes, they're essentially the same concept, though EAR is typically expressed in decimal form.