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)
• \( n \) — Number of compounding periods per year

Explanation: The more frequently interest is compounded, the higher the APY will be compared to the nominal rate.

3. Importance of APY Calculation

Details: APY allows you to compare different CD offers accurately, as it accounts for varying compounding frequencies. A higher APY means more earnings on your investment.

4. Using the Calculator

Tips: Enter the annual interest rate (as a percentage) and the number of times interest is compounded per year (e.g., 12 for monthly, 4 for quarterly).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR doesn't account for compounding, while APY does. APY gives you the true annual return on your investment.

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

Q3: What are typical compounding frequencies for CDs?
A: Common frequencies include daily, monthly, quarterly, semi-annually, and annually.

Q4: Why do some CDs with lower rates have higher APY?
A: This occurs when the CD with the lower nominal rate compounds more frequently than the one with the higher rate.

Q5: Is APY the same as actual earnings?
A: APY shows what you would earn if the money stayed invested for a full year at that rate. Early withdrawals may result in different actual earnings.