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. Accounts with the same nominal rate but different compounding frequencies will yield different actual returns.

4. Using the Calculator

Tips: Enter the annual interest rate as a percentage (e.g., 3.5 for 3.5%) and the number of times interest compounds per year (e.g., 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 you the true earning potential.

Q2: How does compounding frequency affect APY?
A: More frequent compounding results in higher APY. Daily compounding yields slightly more than monthly, which yields more than annual.

Q3: What's a good APY for savings accounts?
A: As of 2023, high-yield savings accounts typically offer 3-5% APY, significantly higher than traditional savings accounts.

Q4: Does APY account for fees?
A: No, APY only reflects the interest earned. Account fees would reduce your actual returns.

Q5: Why does APY matter for savings?
A: Even small differences in APY can significantly impact your savings growth over time due to compounding.