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 results in higher effective yields. For example, monthly compounding (n=12) yields more than annual compounding (n=1) at the same nominal rate.

3. Importance of APY Calculation

Details: APY allows consumers to compare different savings products accurately. Two accounts with the same nominal rate but different compounding frequencies will have different APYs and thus different actual returns.

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). All 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 the true effective annual rate.

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

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

Q4: Is APY the same as effective annual rate?
A: Yes, APY is essentially the effective annual rate expressed as a percentage.

Q5: Why does APY matter for savings accounts?
A: It helps you compare different savings products accurately and understand your true potential earnings.