News and Analytics

How APR differs from APY

Mar 8, 2023
How APR differs from APY
0

APR (Annual Percentage Rate) and APY (Annual Percentage Yield) are both measures used to describe the annual interest rate earned on a financial investment or loan. However, they differ in their calculation and the way they represent the rate of return.

APR is the simple interest rate that a borrower or investor would pay on a loan or investment in a year. It is calculated by dividing the total amount of interest paid over a year by the total amount borrowed or invested. APR does not take into account compounding, which means that it assumes that the interest is not reinvested.

APY, on the other hand, is the effective annual rate of return that a borrower or investor would earn on a loan or investment, taking into account the effect of compounding. APY is always higher than APR because it takes into account the interest earned on the interest that is reinvested.

In summary, APR and APY are both measures of the interest rate on a financial product or loan. APR is the simple interest rate, while APY is the effective annual rate of return that takes into account the effect of compounding. APY is always higher than APR, and the difference between the two depends on the compounding frequency.

APR refers to the simple interest rate, which is the percentage of interest earned on an investment or loan in a year, without accounting for compounding. For example, if you have a loan with an APR of 5%, you will pay $5 of interest for every $100 borrowed each year.

On the other hand, APY takes into account the effect of compounding interest on the rate of return. Compounding is the process of adding interest earned back to the principal amount, resulting in an increasing rate of return over time. APY calculates the effective annual rate of return, taking into account compounding. For example, if you have an investment with an APY of 5%, you will earn more than $5 in interest for every $100 invested each year, due to the compounding effect.

In summary, APR represents the nominal interest rate, while APY represents the effective annual rate of return, taking into account compounding. Therefore, APY is typically a higher figure than APR for the same investment or loan.

Comments

Latest news

XRP and Litecoin Experiencing High Levels of FOMO

XRP and Litecoin Experiencing High Levels of FOMO

Market participants are getting increasingly excited about XRP and Litecoin
Bitcoin’s Weekend Recovery Doesn’t Mean the Downturn Is Over: Bitfinex

Bitcoin’s Weekend Recovery Doesn’t Mean the Downturn Is Over: Bitfinex

Bitfinex analysts have warned crypto investors to be cautious as bitcoin’s (BTC) recovery over the weekend is not a sign that its correction is over; the asset could witness more bloodshed in the near
Bitcoin indicators flash ‘greed and FOMO’ as ETF inflows top $300M

Bitcoin indicators flash ‘greed and FOMO’ as ETF inflows top $300M

Key Bitcoin sentiment indicators have quickly flipped into “greed” territory amid a sharp uptick in the crypto market and strengthening Bitcoin ETF inflows.
Bitcoin briefly touches $65,000 amid strong ETF inflows

Bitcoin briefly touches $65,000 amid strong ETF inflows

Bitcoin's surge highlights growing investor confidence and potential for further market gains, reflecting a shift from fear to greed.The post Bitcoin briefly touches $65,000 amid strong ETF inflows a
Show more

Latest Dapp Articles

Show more

You may also like