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Confused about the Interest Rate and APY ?

People are often confused about interest rates when they see terms such as APY and interest rate quoted on the savings accounts. Here is the explanation,

“APY (Annual Percentage Yield)” is the rate of interest if the interest is compounded.

The “interest rate” is the amount of interest that will be paid on an investment you make.

If compounding is involved, APY interest will be higher than your standard interest rate. APY takes into account the interest rate and compounding period to calculate the interest

Here is the example.

APY vs Annual Interest Rate

For example, take three accounts both paying 3% per year. An account one pays interest Quarterly, will earn your APY 3.033%; an account one pays interest daily, will earn your APY 3.045%; while an account one pays interest yearly, will earn your APY 3% (just same as the annual interest rate).

You money will earn a greater interest rate if the interest is compounded daily instead of monthly. That is, more the the frequency of compounding, the greater your rate of return will be.

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