What is the difference between APR and APY?
An example of an AI chatbot conversation about understanding APR and APY in finance.
What is the difference between APR and APY?
APR stands for Annual Percentage Rate, while APY stands for Annual Percentage Yield. APR reflects the cost of borrowing, including interest and fees, without compounding. APY, on the other hand, takes compounding into account, showing the actual return on an investment over a year.
Can you give me an example of how they work?
Sure! If you have a loan with an APR of 5%, you would pay 5% of the principal in interest over a year. If you invest with an APY of 5%, and interest is compounded monthly, you would actually earn slightly more than 5% due to the effects of compounding.
Why is APY usually higher than APR?
APY is usually higher than APR because it accounts for the effects of compounding interest. The more frequently interest is compounded, the more you earn on your investment.
How can I calculate APY from APR?
You can calculate APY from APR using the formula: APY = (1 + (APR/n))^n - 1, where n is the number of compounding periods per year.
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