What is the difference between APR and APY?
APR is the simple annual interest rate without compounding, while APY accounts for compounding within the year, so APY is always equal to or higher than APR for the same nominal rate.
How do you convert APR to APY?
Divide the APR by the number of compounding periods per year, add 1, raise that to the power of the number of periods, then subtract 1: APY = (1 + APR/n)^n - 1.
Is a higher APY always better for savers?
Yes, for savings and investment accounts a higher APY means more interest earned on your balance over a year, assuming the rates are compounded over the same time frame.
Does compounding frequency affect how much APY exceeds APR?
Yes, the more frequently interest compounds (daily versus monthly versus annually), the larger the gap between APY and APR for the same nominal rate.
Why is APY higher than APR for the same account?
Because APY includes the effect of earning interest on previously accrued interest within the year, while APR only reflects the stated nominal rate without that compounding benefit.