Whats the difference between APY (annual percentage yield) and APR (annual percentage rate)?
A. You’ll typically see APY in regard to interest-bearing accounts and APR cited in relation to mortgage loans. From InvestorWords.com, here’s the definition of APR: “The yearly cost of a mortgage, including interest, mortgage insurance, and the origination fee (points), expressed as a percentage.” Here’s the definition of APY: “The effective annual return. The APY is calculated by taking one plus the periodic rate raised to the number of periods in a year. For example, a 1% per month rate would offer an APY of 12.68%.” The APY is informative for Fools because it tells you what to expect from the interest rate, taking into account how often interest is applied. Here’s a very rough and simplified example. Let’s say that an account where you keep $10,000 pays 6% interest. If the interest is compounded just once a year, you’d earn $600 at the end of the year. But most interest compounds more often than once a year. Typically, it’s more like monthly, weekly, or daily. Let’s imagine that yo
