1. What is APY?

APY (Annual Percentage Yield) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Unlike simple interest, APY considers that interest is earned on previously accumulated interest.

2. How Does the Calculator Work?

The calculator uses the APY formula:

Where:

• \( r \) — Annual interest rate (in decimal form)
• \( m \) — Number of compounding periods per year

Explanation: The formula calculates the effective annual rate when interest is compounded multiple times per year.

3. Importance of APY Calculation

Details: APY allows investors to compare different investment options accurately, as it standardizes the return rate regardless of compounding frequency.

4. Using the Calculator

Tips: Enter the annual interest rate in decimal form (e.g., 0.05 for 5%) and the number of compounding periods per year (e.g., 12 for monthly compounding).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY does. APY gives a more accurate picture of actual earnings.

Q2: How does compounding frequency affect APY?
A: More frequent compounding leads to higher APY, as interest is earned on interest more often.

Q3: What are typical compounding frequencies?
A: Common frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), weekly (52), and daily (365).

Q4: Can APY be negative?
A: Yes, if the investment has a negative return, the APY will be negative, indicating a loss.

Q5: How is APY used in banking?
A: Banks use APY to advertise savings accounts and CDs, as it shows the effective yield customers can expect.