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 rate, APY gives you a more accurate picture of your actual earnings.

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 how often interest is compounded (daily, monthly, quarterly, etc.) to give you the actual annual yield.

3. Importance of APY Calculation

Details: APY is crucial for comparing different investment or savings options because it standardizes the comparison by accounting for different compounding frequencies.

4. Using the Calculator

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

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 actual yield you'll earn.

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

Q3: What are typical compounding frequencies?
A: Common frequencies are annually (1), semi-annually (2), quarterly (4), monthly (12), weekly (52), and daily (365).

Q4: Why is APY higher than the nominal rate?
A: APY includes the effect of earning interest on previously earned interest (compounding), making the effective yield higher than the stated rate.

Q5: How accurate is this calculator?
A: The calculator provides mathematically precise APY based on the inputs. However, actual bank yields may vary slightly due to rounding methods.