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APY Formula:
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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, compound interest calculates interest on both the initial principal and the accumulated interest from previous periods.
The calculator uses the APY formula:
Where:
Explanation: The formula calculates the effective annual rate of return when interest is compounded multiple times throughout the year.
Details: APY provides a standardized way to compare investment products with different compounding schedules. It shows the true earning potential of an investment account, helping investors make informed decisions.
Tips: Enter the nominal interest rate as a percentage and the number of times interest is compounded per year. All values must be valid (rate ≥ 0, compounding frequency ≥ 1).
Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) represents the simple interest rate without compounding, while APY includes the effect of compounding, making it a more accurate measure of actual returns.
Q2: How does compounding frequency affect APY?
A: The more frequently interest is compounded, the higher the APY will be for the same nominal rate, due to the "interest on interest" effect.
Q3: What are typical compounding frequencies?
A: Common frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), weekly (52), and daily (365).
Q4: Can APY be negative?
A: Yes, if an investment loses value over time, the APY can be negative, representing a negative return on investment.
Q5: Is APY the same as effective annual rate (EAR)?
A: Yes, APY and EAR are essentially the same concept - both represent the effective annual return including compounding effects.