Sep 10, 2010 - 02:02 AM
NewInvestorToolkit
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Sep 10, 2010 - 02:02 AM
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NewInvestorToolkit |
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The Difference Between APR and APYMany people who are researching various types of deposits or loans (e.g. savings accounts, mortgages) don’t understand the difference between APR and APY. APR stands for annual percentage yield, while APR is annual percentage rate. Many people who are researching various types of deposits or loans (e.g. savings accounts, mortgages) don’t understand the difference between APR and APY. APR stands for annual percentage yield, while APR is annual percentage rate. While these terms sound complicated, the fact is that the difference between APR and APY is actually very straightforward. APR does not take into account monthly, or even daily compounding of interest. For example, let’s say a bank offers a 4% APR, with annual compounding, and that you deposit $100 at the beginning of the year. At the end of the year, you would have $104. Now, let’s assume another bank offers the same 4% APR, but with semiannual compounding. After 6 months, your account would have $102. In the last 6 months of the year, the 4% APR is applied not to the $100 balance,m but to the $102 balance. Therefore, at the end of the year you would have not $104, but rather $104.04. This would translate to an APY of 4.04%. From an investor’s point of view, the difference between APR and APY is quite important. An investor will usually prefer to know or calculate the APY, as this tells him or her the true return earned on an investment in a say a savings account or CD. Print this | Send this | Hits: 261 | |
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