is important to understand the difference between annual percentage
rate (APR) and annual percentage yield (APY). We hope to give you
a better understanding of APR and APY.
- Annual Percentage Rate (APR) is the
annual rate of interest without taking into account the compounding
of interest within that year.
- Annual Percentage Yield (APY) takes into account the effects of compounding and is a better
measure of what you are actually earning.
- Here is an example to show the difference between APR
- You deposit $5,000 into a CD earning 5% APR
- The period
rate is 5%/365, or .01% per day
- APY=(1+Period Rate)^Periods
- So you are actually earning 5.13% interest per
year due to compounding.