APY - Annual percentage yield is the rate of returns earned on an investment, taking into account the effect of compounding interest.
APR - Annual percentage rate is the yearly interest generated on an initial investment.
(Don’t worry I’ll simplify.)
The major difference between the both is Compounding interest and Simple interest. For example, If I put $1000 in a project with 20% APR, I should be earning 1.67% interest monthly which is approximately $16.7 monthly.
At the end of the financial year i should have $1,200, and then If I put $1000 in a project with 20% APY, earning about 1.67% monthly which is about $16 monthly, by the following month my return is going to be 1.67% of $1016 not $1,000 again. The returns I got the previous mode will be added to the initial investment and then calculated.
This is what is called compound interest. Your profits are added to your initial investment and will make your funds grow at a faster rate than simple interest.
The rate at which compound interest accrues will depend on the frequency of compounding.
The best APY are the ones with daily interests or monthly as your funds compound faster, such that the compound interest is higher.
But the compound frequency will depend on the Investment.
I hope I was able to simplify this for y’all.
Difference between APY and APR
Reviewed by Finance Matters
on
January 22, 2022
Rating:
Reviewed by Finance Matters
on
January 22, 2022
Rating:
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