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 gives you the actual yield you'll earn in a year.

2. How Does the Calculator Work?

The calculator uses the APY formula:

Where:

• \( r \) — Annual interest rate in decimal form (e.g., 0.039 for 3.9%)
• 365 — Number of compounding periods per year (daily compounding)

Explanation: The formula calculates the effective annual rate when interest is compounded daily, which is common for high-yield CDs like those from Marcus.

3. Importance of APY Calculation

Details: APY allows you to compare different CD offers accurately, as it shows the true yield after compounding. A higher APY means more earnings on your deposit.

4. Using the Calculator

Tips: Enter the advertised annual interest rate (e.g., 3.90). The calculator will show the corresponding APY, which is typically slightly higher than the nominal rate due to compounding.

5. Frequently Asked Questions (FAQ)

Q1: Why is APY higher than the interest rate?
A: APY accounts for compound interest - the interest earned on previously accumulated interest - making the effective yield higher than the simple rate.

Q2: How often does Marcus compound interest?
A: Marcus compounds interest daily, which is why we use 365 compounding periods in the formula.

Q3: Is APY the same as APR?
A: No, APR (Annual Percentage Rate) doesn't account for compounding, while APY does. APY gives a more accurate picture of earnings.

Q4: Does this calculator work for other banks' CDs?
A: Yes, as long as the CD compounds interest daily. Some banks may compound differently (monthly, quarterly), which would require adjusting the formula.

Q5: Are there penalties for early withdrawal?
A: Most CDs, including Marcus, charge penalties for early withdrawal, which would affect your actual yield if you withdraw before maturity.