Question 1

What is the difference between APR and APY?

Accepted Answer

APR is the stated nominal rate; APY is what you actually earn after compounding. APY is always at least as high as APR and rises with more frequent compounding.

Question 2

How is APY calculated?

Accepted Answer

APY = (1 + rate ÷ n)^n − 1, where n is the number of compounding periods per year.

Question 3

Why does compounding frequency matter?

Accepted Answer

More frequent compounding means interest starts earning interest sooner, raising the effective yield for the same nominal rate.

Effective Annual Yield

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Effective yield

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