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APY Formula:
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APY (Annual Percentage Yield) is the real rate of return earned on a savings account or investment, taking into account the effect of compounding interest. It provides a more accurate representation of actual earnings than the nominal interest rate.
The calculator uses the APY formula:
Where:
Explanation: The formula calculates the effective annual rate by accounting for how often interest is compounded throughout the year.
Details: APY is crucial for comparing different savings accounts and investments because it reflects the true earning potential, considering compounding frequency. Higher APY means better returns on your deposits.
Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%), and the number of compounding periods per year (e.g., 12 for monthly, 365 for daily). All values must be valid (rate > 0, compounding periods ≥ 1).
Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) typically refers to borrowing costs and doesn't include compounding, while APY includes compounding effects and represents actual earnings.
Q2: How does compounding frequency affect APY?
A: More frequent compounding results in higher APY for the same nominal rate. Daily compounding yields slightly higher returns than monthly compounding.
Q3: What are typical APY ranges for savings accounts?
A: APY ranges vary but typically fall between 0.01% to 5% for standard savings accounts, with high-yield accounts offering higher rates.
Q4: Why is APY important for savers?
A: APY allows savers to accurately compare different bank accounts and choose the one that will generate the highest returns on their deposits.
Q5: Does APY account for fees?
A: No, APY calculation only considers the interest rate and compounding frequency. Account fees and other charges are not included in the APY formula.