What is the difference between APY and interest rate?
Annual Percentage Yield (APY): This is the percentage rate on interest-bearing deposit accounts that reflects the total interest to be earned on an account based on the interest rate and frequency of compounding for a 365-day period. Interest rate: Interest rate (or simple interest rate) is the annual rate of interest paid on an account which does not reflect the compounding of interest within that year.
Here is an article from investopedia. One (APY) assumes compounding of interest, the other (APR) does not. Defining APR and APY APR is the annual rate of interest without taking into account the compounding of interest within that year. Alternatively, APY does take into account the effects of intra-year compounding. This seemingly subtle difference can have important implications for investors and borrowers. Here is a look at the formulas for each method: For example, a credit card company might charge 1% interest each month; therefore the APR would equal 12% (1% x 12 months = 12%). This differs from APY, which takes into account compound interest. The APY for a 1% rate of interest compounded monthly would be [(1 + 0.01)^12 – 1= 12.68%] 12.68% a year. If you only carry a balance on your credit card for one month’s period you will be charged the equivalent yearly rate of 12%. However if you carry that balance for the year, your effective interest rate becomes 12.
Annual Percentage Yield (APY) is the percentage rate on interest-bearing deposit accounts that reflects the total interest to be earned on an account based on the interest rate and frequency of compounding for a 365-day period. The Interest rate (or simple interest rate) is the annual rate of interest paid on a savings account which does not reflect the compounding of interest within that year. There’s very little difference between the two: the thing to remember is that the APY projects what interest you’re going to obtain through your savings account rates over the course of a year – the interest earned snowballs in on itself – your interest earned is earning interest over the course of a given year.
