What is the difference between interest rate and Annual Percentage Yield (APY) rate for a CD account or saving

4 Answers

  • 1 decade ago
    Favorite Answer

    This is the simplest answer.

    APR is the rate of your interest on an anual basis. since interest is apllied on a daily prorated basis, you accumulate interest on interest. A 12% APR would yield 1%per month and one thirtieth of that per day.

    Therefore APY is the effective yield, and is more than the APR.

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  • 1 decade ago

    The nominal interest rate is the rate used to calculate interest payments. The APR is the "net" resulting yield of the principle which includes other costs (or bonuses), like application fees, closing costs, signup bonuses, etc.

    So for example, if you're looking at a CD which is being advertised as 5.99% APR but the interest rate is 5.50%, it's because you're getting a $25 new account bonus. That's a good example. THe more common example is when you're buying a house. Lenders will advertise a 6% mortgage, but the APR is really 6.5%. THis is because you have to pay closing costs at the time you get your money, thus driving up the effective interest rate.

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  • 1 decade ago

    Is it better to earn 5% on your money with the interest credited every 3 months or to earn 5% on your money with the interest credited at the end of the year.

    The answer is getting interest credited every three months. If your interest gets credited every three months, you start earning interest on the interest you earned (in addition to the interest on your original investment).

    The APY takes this benefit into account. Therefore, if interest is credited to your account more frequently than annually, the APY is higher than the interest rate.

    For those who are more quantitatively inclined, the way to compute the APY on a CD is as follows:

    1. Take the interest rate and divide by the number of times interest gets credited each year. For instance 5%/4 = .05/4 = 0.0125

    2. Take that result and add 1 to it. For instance 1 + 0.0125 = 1.0125

    3. Here's the tricky part. Take the last result and raise it to a power equal to the number of times interest is credited each year (in this case, 4). This means that you multiply the number by itself 4 times. For instance 1.0125 x 1.0125 x 1.0125 x 1.0125 = 1.0509 (rounded off)

    4. Take this result, subtract 1, then multiply by 100.

    For instance, 1.0509 - 1 = .0509 x 100 = 5.09%. This is the APY.

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  • gaidos
    Lv 4
    3 years ago

    The APY is composed of the compounding. the cost does not. maximum CD's submit interest extra suitable than as quickly as a twelve months, so which you're getting interest on the interest - that's what makes the APY greater. while you're having the interest deliver to you each month, use the cost. while you're leaving it in, use the APR.

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