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 more frequently interest is compounded within a year, the higher the APY will be compared to the nominal rate.

3. Importance of APY Calculation

Details: APY allows consumers to compare different financial products accurately. It shows the true yield you'll earn, accounting for how often interest is compounded (daily, monthly, quarterly, etc.).

4. Using the Calculator

Tips: Enter the annual interest rate as a percentage (e.g., 2.5 for 2.5%) and the number of times interest compounds per year (e.g., 12 for monthly).

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 what you'll actually earn.

Q2: How does compounding frequency affect APY?
A: The more frequent the compounding, the higher the APY. Daily compounding yields more than monthly, which yields more than annual compounding.

Q3: What are typical compounding periods?
A: Common periods are daily (365), monthly (12), quarterly (4), semi-annually (2), and annually (1).

Q4: Can APY be lower than the nominal rate?
A: No, APY is always equal to or higher than the nominal rate due to compounding effects.

Q5: Is APY the same as effective annual rate (EAR)?
A: Yes, APY and EAR are essentially the same concept, though APY is the term more commonly used for deposit accounts.