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 rate, APY gives you the actual yield you'll earn in a year.

2. How Does the Calculator Work?

The calculator uses the APY formula:

Where:

• \( r \) — Annual interest rate (in decimal form, e.g., 0.05 for 5%)
• \( n \) — Number of compounding periods per year

Explanation: The formula shows how more frequent compounding leads to higher effective yields, as interest earns interest more often.

3. Importance of APY Calculation

Details: APY allows you to compare different CD offers accurately. Banks may offer the same nominal rate but compound differently, resulting in different actual yields.

4. Using the Calculator

Tips: Enter the annual interest rate as a decimal (e.g., 0.03 for 3%) and the number of times interest compounds per year (e.g., 12 for monthly).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR doesn't account for compounding, while APY does. APY gives the true annual rate of return.

Q2: How does compounding frequency affect APY?
A: More frequent compounding (daily vs. monthly) results in higher APY for the same nominal rate.

Q3: What are typical CD compounding periods?
A: Common compounding frequencies are daily (365), monthly (12), quarterly (4), or annually (1).

Q4: Does APY account for early withdrawal penalties?
A: No, APY calculations assume you hold the CD to maturity. Early withdrawals would reduce actual yield.

Q5: Is APY the same as effective annual rate (EAR)?
A: Yes, APY and EAR are essentially the same concept - both account for compounding effects.