APR vs APY

It is important to understand the difference between annual percentage rate (APR) and annual percentage yield (APY). We hope to give you a better understanding of APR and APY.

  • Annual Percentage Rate (APR) is the annual rate of interest without taking into account the compounding of interest within that year.
  • Annual Percentage Yield (APY) takes into account the effects of compounding and is a better measure of what you are actually earning.
  • Here is an example to show the difference between APR and APY:
    • You deposit $5,000 into a CD earning 5% APR
    • The period rate is 5%/365, or .01% per day
    • APY=(1+Period Rate)^Periods Per Year-1
    • APY=(1+.0001)^365-1
    • APY=5.13%
    • So you are actually earning 5.13% interest per year due to compounding.
 
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