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 that interest is earned on previously accumulated interest.

2. How Does the Calculator Work?

The calculator uses the APY formula:

Where:

• \( Rate \) — Annual interest rate in decimal form
• \( Compounding\ Periods \) — Number of times interest is compounded per year

Explanation: The formula shows how more frequent compounding leads to higher effective yields, as interest is earned on interest more often.

3. Importance of APY Calculation

Details: APY allows for accurate comparison between different savings or investment products with varying compounding frequencies. It shows the true earning potential of an account.

4. Using the Calculator

Tips: Enter the annual interest rate in decimal form (e.g., 0.05 for 5%), and the number of compounding periods per year. All values must be valid (rate ≥ 0, periods ≥ 1).

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 vs. yearly) results in higher APY for the same nominal rate.

Q3: What are typical compounding periods?
A: Common periods include daily (365), monthly (12), quarterly (4), semi-annually (2), and annually (1).

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

Q5: Is APY the same as effective annual rate (EAR)?
A: Yes, APY and EAR are essentially the same concept, though APY is more commonly used for deposit accounts.