Finance
APY Calculator
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Good to know
Why banks quote both
US regulation (Truth in Savings) requires APY on deposit products precisely because nominal rates understate real earnings. When comparing accounts, compare APYs; they are directly comparable regardless of compounding style.
Loans run the other way
For borrowing, the same math works against you: frequent compounding raises the effective cost of a nominal loan rate. Mortgage APR disclosures attempt the reverse adjustment.
How it's calculated
The math behind this calculator
APY = (1 + APR/m)^m − 1Nominal rates quote a yearly figure without acknowledging intra-year compounding. APY applies the compounding explicitly: split the nominal rate across m periods per year, compound, and measure the true yearly growth.
Assumptions & limitations
- Rate stays constant through the year.
- Interest reinvests immediately at the same rate.
- No fees or promotional tiers included.
Worked example
A 5% APR compounded monthly yields about 5.12% APY; free extra return purely from compounding twelve times a year.
FAQ
Frequently asked questions
- Which matters more, APY or compounding frequency?
- APY; it already bundles frequency. A daily-compounded 4.9% nominal account can beat a monthly-compounded 4.95% one.
- What is continuous compounding?
- The mathematical limit as m → ∞: APY = e^APR − 1. At 5% that is about 5.13%, barely above daily compounding.
- Is APY the same as EAR?
- Yes; effective annual rate and APY describe the same concept.
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