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. It provides a more accurate measure of potential earnings than the simple interest rate.

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, showing how interest earned is added to the principal and earns additional interest in subsequent periods.

3. Importance of APY Calculation

Details: APY allows savers 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. Both values must be positive numbers.

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

Q3: What are typical APY rates for high-yield accounts?
A: As of 2023, top high-yield savings accounts offer APYs between 4-5%, though rates fluctuate with market conditions.

Q4: Is APY the same as annual return?
A: Yes, APY represents the actual annual return when compounding is considered.

Q5: Why do banks advertise APY instead of APR for savings?
A: APY shows the higher, more attractive number that includes compounding effects, while APR would show a lower base rate.