1. What is APY?

APY (Annual Percentage Yield) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Unlike simple interest, APY considers how often interest is applied to the balance.

2. How Does the Calculator Work?

The calculator uses the APY formula:

Where:

• \( r \) — Annual interest rate (in decimal form)
• \( n \) — Number of compounding periods per year

Explanation: The formula shows how more frequent compounding leads to higher effective yields, as each interest payment is added to the principal for future interest calculations.

3. Importance of APY Calculation

Details: APY allows investors to accurately compare different investment options by showing the true annual return when compounding is considered. This is especially important for CDs and savings accounts.

4. Using the Calculator

Tips: Enter the nominal interest rate (as a percentage) and the number of times interest is compounded per year. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY does. APY gives a more accurate picture of actual earnings.

Q2: How does compounding frequency affect APY?
A: More frequent compounding (daily vs. monthly, for example) results in higher APY for the same nominal rate.

Q3: What are typical compounding periods for CDs?
A: Common compounding frequencies include daily, monthly, quarterly, semi-annually, and annually.

Q4: Can APY be lower than the nominal rate?
A: No, APY is always equal to or higher than the nominal rate due to the effect of compounding.

Q5: Is APY the same as effective annual rate (EAR)?
A: Yes, APY and EAR are essentially the same concept - both account for compounding to show the true annual return.