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Banking 101: What is the difference between APR and APY?


Written by Brittney Laryea | Published on 2/16/2019

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

APR and APY can be confusing financial concepts, but knowing the difference between the two ways to calculate annual interest can help you make more informed decisions when saving and investing. Both APR and APY affect how much you earn or owe when applied to account balances.

In this article we will cover:

APR vs. APY: Defined

APR stands for annual percentage rate. It’s the annual rate of interest paid on a loan. But, its calculation does not account for any compounding of the interest during the year. So, it’s the interest rate if you don't account for how often that rate is applied to the balance during the year.

APY stands for annual percentage yield. Unlike APR, APY takes into account any compounding done during the year such as daily or monthly compounding. Some products, like credit cards, actually compound interest daily. APY reflects the periodic interest rate and the frequency at which it’s compounded during a 365-day period.

A saver is generally looking to get paid a higher interest rate on their investment. A bank or credit union has more incentive to show you the APY on its deposit accounts like certificate of deposits, instead of the APR because the APY is generally higher.

A borrower is generally looking for the lowest possible rate they can pay to borrow on a mortgage, personal loan, credit card or what have you. When you’re borrowing, a lender has more incentive to advertise using the APR rather than APY on the product so that you, the borrower, get the sense you’re paying the lender less than you actually will pay in interest.

How compounding works:

Compounding is when interest is charged or paid on top of the existing balance plus interest that has already accumulated.

“This is a powerful tool for an investor, but a crushing reality for a debtor with credit card or other consumer debt,” Justin Harvey, president and founder of Philadelphia, Pa.-based Quantifi Planning, told Deposit Accounts.

When interest compounds on debt, it hurts because it means you wind up owing much more than your original balance.

When it comes to saving and investing, however, compounding interest is your friend. Let’s say you earn 5% on $1,000 ultimately netting a $50 return. If you decide to re-invest the $1,050 ($1,000 plus the $50 you earned in interest the first time around), you end up with a balance of $1,102.50.

The $52.50 earned in interest on round two was the result of 5% being applied to $1,050, instead of the $1,000 originally invested. If you were to re-invest the $1,102.50 at a 5% return rate a third time, you’d get $1,157.63 and so on.

“The interest on interest may not seem much at first, but the impact is very significant over long periods of time,” Justin Choy, a portfolio analyst with Frisch Financial Group, told Deposit Accounts. “It’s similar to a snowball rolling down a hill. Over time, the snowball gets bigger and the rate of which it’s getting bigger also gets faster.”

What types of products use APR?

Financial products used for borrowing generally advertise an APR. That includes financial borrowing products repaid with interest like personal loans, lines of credit and credit cards.

“When borrowing money, APR also accounts for other costs associated with obtaining that loan, not just interest,” said Choy.

Those costs may include loan origination or underwriting fees that increase the overall cost of your loan.

How to calculate APR

To calculate APR, you’d take the periodic interest rate (the interest rate at the time of compounding) and multiply it by the number of times the periodic rate is applied during a 365-day period. The equation is as follows:

APR = periodic rate * number of periods in a year

So, if a credit card company charges a 24% APR and compounds interest daily as credit cards often do nowadays, that’s akin to charging 0.066% interest each day.

24% APR = 0.066% periodic rate * 365 periods

What types of products use APY?

Investments that offer a fixed return like deposit accounts generally advertise an annual percentage yield or APY. That group includes financial products that earn a return for savers like savings and checking accounts, certificate of deposit accounts and money market accounts.

How to calculate APY

To calculate APY, you’d take into account compounded interest, so the equation is a little different. You would take the periodic interest rate as a decimal, add 1, then multiply it by itself the number of periods the rate is applied. When you get that number, subtract 1 to get the APY.

The equation is as follows:

APY = ((1+ decimal form of periodic rate) ^ number of periods in a year) - 1

27.23% APY = (1+ .00066) ^ 365 periods in a year - 1

Understanding APY is valuable when you’re comparing investments that offer a fixed return like deposit accounts. If you’re trying to figure out the total amount of interest you can earn on a CD or money market account, for example, you’ll want to use APY, as it accounts for each time interest is compounded on the balance.

Why is it important to know the difference between APR vs. APY?

The difference between the two rate calculations is important to know when you are comparing borrowing options. When you compare financial products, Harvey advises borrowers make sure to compare apples to apples — APY to APY and APR to APR — to calculate the best deal for you.

You can use both calculations to see what you’re really paying to borrow, and understand how the periodic interest rate is applied to a loan.

“I recommend calculating APY whenever possible because the differences may be larger than you think,” said Choy.

It’s important to remember the APY calculation adds more interest since the interest is applied to a larger balance each period.

“The more frequent the compounding, the greater the differential between the APR and the APY,” said Harvey.

With a periodic rate that compounds annually, the APY will equal the APR, whereas with a periodic rate compounded daily (like credit cards and other debts often do), the APY may be 2% to 3% higher than the APR.

When the difference between APR vs. APY matters:

Although borrowing products generally advertise an APR, the interest rate may be compounded periodically, so it may be worth it to you to calculate the APY, too.

For example, if you take out a 5-year personal loan for $10,000 at 5% APR including fees, you might not notice that the periodic interest rate (5% APR/12 = 0.42%) is applied on each monthly payment. When applied to 12 periods in a calendar year, you actually end up paying back 5.12% in interest, or $10,512 instead of $10,500.

The $12 may not seem like much in the grand scheme of things. But if your goal is to save money, it’s worth calculating the total amount of interest you’d pay over time when comparing loans.

Harvey advises consumers generally calculate the APY using daily compounding — the most frequent interval possible aside from intraday compounding — for debts like mortgages and credit cards.

Why compounding isn’t realistic with revolving loans.

Trying to keep up with the APR shown on your terms and the actual APY you may pay at year’s end on a revolving loan like a credit card may be futile.

For example, most credit cards compound interest daily, but advertise an APR, which may be misleading to borrowers.

With Capital One credit cards, for example, the interest is based on the daily average balance on your card for the month added to the balance each billing period. If you carry a balance from month to month, each new interest calculation is made using the new, higher base (this is APY in action).

“This is also the way investments work (compounded growth) but when the credit card company is using this principle to make money on a consumer, it's a very bad place to be for that consumer, because paying compounding interest on an ongoing basis is a very expensive proposition,” said Harvey.

The good news: “If you never carry a balance on a credit card, these rates will never be relevant because you never pay any interest. This is the best place for a consumer to be,” Harvey added.

Comments
deplorable 1
deplorable 1   |     |   Comment #1
Nice job Brittney. Many posters on here really need to read this article. I was hoping it would contain how a CD that that has a term that is under a year from 1-11 months that advertises a APY for comparison purposes is actually the correct APY for the term period of the CD. Many people get confused by this. For example the NFCU 6 month CD is paying 2.956% APR with a APY of 3%. The APY is still correct even though this is only a 6 month CD because it was calculated assuming daily compounding rate of 2.956% over a 12 month term.
Martin
Martin   |     |   Comment #2
Misleading comparison, you should just say that the people on a 6 mo CD will make less than 1.5% APY not 3 percent. Some will think that in 6 mo they will walk out with $3k on a $100K CD.
larry
larry   |     |   Comment #3
Comment #2, What they should be doing is plugging in the numbers over at bankratedotcom for the payout. If you put in $100k @ 3% APY the payout at the end of six months is 1,488.92 plus the principal. Not a bad return if one thinks rates will bump up again before the eoy.
Carpline
Carpline   |     |   Comment #5
Or use DA's Compound Interest Calculator - https://www.depositaccounts.com/tools/compound-interest-calculator.aspx
deplorable 2
deplorable 2   |     |   Comment #4
#2
No, it's simple mathematical fact. People can get by with addition. subtraction, multiplication and division...all taught in elementary school. Interest computations require multiplication and addition. If that's too confusing, hire an accountant.
deplorable 1
deplorable 1   |     |   Comment #6
larry seems to be the only one who gets it. I'll try to explain this again. The APY IS 3% even though the CD is only 6 months. To prove this let's assume that this same 6 month CD is still available and that it auto renews into another 6 month CD at the same term essentially making this a one year CD. Now would the interest rate still be 2.956% APR with APY of 3%? Answer YES! deplorable 2 you had better stay in school or hire a accountant.
Batty
Batty   |     |   Comment #11
deplorable 1 #6, you can not compare apples and oranges, 6 mo CD 12 mo CD in the APY period. The 6 mo CD is not renewable, it is your hypothetical assumption and therefore wrong. larry is more right than you, at 6 mo term you will have $1,488.92 and not $1,500.00 and that is where you are wrong in the assumption.
deplorable 1
deplorable 1   |     |   Comment #14
@Batty: I agree with larry 100% You are confusing doing the math computation to figure out how much you will earn in 6 months with the APY. My point in the post above was that no matter the term the 3% APY still stands correct. It is to be used for comparison purposes. I will give another example:
CD #1 9 month 5% APY
CD #2 12 month 4% APY
Which CD has the higher interest rate? Answer CD #1
It was the APY that allowed me to compare the 2 terms on equal footing.
DummyInvestor
DummyInvestor   |     |   Comment #73
On a point of accuracy, let's remember what the letters APY denote" ANNUAL Percentage Yield - with an emphasis on the word ANNUAL. If your CD has a 6 month term and earns 2.956% APR, it will earn 1.478% after 6 months, and 3% after 12 months, because the interest that is earned in the first 6 months earns interest of its own for the next 6 months. In this situation you have two compounding periods of 6 months each. The situation would be identical for a 12 month CD earning 2.956% APR if, by its terms, it compounds every 6 months. So the APY is the EFFECTIVE return on your money (yield) for one year, and it depends on two variables: the APR, which is only a NOMINAL rate, and the number of times the interest earned is compounded each year.
deplorable 1
deplorable 1   |     |   Comment #12
Whoops my apologies D2 I thought that was directed at me. Please redirect comment above to Martin! lol
deplorable 1
deplorable 1   |     |   Comment #26
@Martin: No you could say that they will make .015 x $100,000 in 6 months or $1,500. That is not the same thing as 1.5% APY. The only way you could call that 1.5% APY is if you left that money in that CD earning 0% for the next 6 months.
deplorable 1
deplorable 1   |     |   Comment #7
Here is a calculator that will convert a APR into a APY or a APY into a APR. If you don't believe me then plug in any numbers you want for any term CD and you will see for yourself.
https://www.omnicalculator.com/finance/apy
deplorable 1
deplorable 1   |     |   Comment #8
I used this calculator and came up with the exact same number as larry:
https://www.omnicalculator.com/finance/apy
Red Flag Notice
Red Flag Notice   |     |   Comment #9
Why would ANYONE choose a 3% CD that takes a full year to pay instead of a CD that takes 6 months to pay?

The issue is not compound interest, it is the interest and the time perioed!
deplorable 1
deplorable 1   |     |   Comment #10
@Red Flag: NFCU compounds daily and credits monthly. Looks like we now need a article to explain compound interest.
Batty
Batty   |     |   Comment #13
#10, mathematical assumptions do not match your practical example. 6mo CD can not equal the APY (Y) stands for a year not 6 months or 1/2 APY. You always wind up short when the CD closes at 6 month and nor receiving the 1.5% APY at 6 months. In the example above you get 1.48% APY not 1.5%.
Forget your calculators, show me the real money received at 6 mo.
Red Flag Notice
Red Flag Notice   |     |   Comment #15
who cares wheh it compounds?? what matters is APY and 3% in 6 month is TWICE as good as 3% in 1 year.
deplorable 1
deplorable 1   |     |   Comment #16
Guys see my comment #14 You are confusing calculating your interest with a APY. Sure your interest computation may be correct I'm not disputing that. What I'm saying is that the stated APY for any term less than a year is still correct for the length of that CD term. Do you guys think that the banks are lying to you about the APY?
CPA
CPA   |     |   Comment #17
deplorable 1, the APY is exponential curve and not linear, maybe that is what is confusing you. The interest on the recalculation rises every month and when you stop it at 6 months, you alway get less because the exponent for integrating the interest with the principal is missing for the next 6 months.
deplorable 1
deplorable 1   |     |   Comment #18
@CPA: Yeah I get that but you still can't say that the 3% APY is wrong or call it 1.5% APY either. Yes it is making the assumption that interest would compound for a year for comparison purposes. How else would you be able to quickly compare rates for ANY odd term CD?
Smith
Smith   |     |   Comment #19
#18, APY is always wrong if the term is less than one year and that is the fact. Stop spreading misinformation.
For terms less than one year, add the principal and the interest received, multiply by the months of the CD and divide it by 12 (that is your APY), see how simple it is, APY will always be wrong on your above APY assumption.
deplorable 1
deplorable 1   |     |   Comment #21
Look the APY is correct. Yes it makes the assumption that the interest will continue to compound for a year. Well guess what that is what it is supposed to do! You guys are also making a assumption. Your assumption is that your money will be earning 0% for the remaining 6 months! You could reinvest that money in another CD earning 3.5% APY and you would result in a average of APY of 3,25%. Why is this such a tough concept for people to grasp?
AnnO
AnnO   |     |   Comment #28
It's absurd how many people read this site who still don't understand the meaning of ANNUAL Percentage Rate/Yield. That's what APR/APY stands for. It's not a 6mPY just because it's on a 6-month CD. Regulated financial institutions are only allowed to advertise APRs/APYs, to ensure fair comparisons. Simply divide the advertised rates by 12 to get an approximate idea of how much you will get per month until the CD ends. After which, if you have any idea how to handle money, you move it to another account with a decent rate, instead of putting it all under your mattress.
deplorable 1
deplorable 1   |     |   Comment #55
I'm not the one confused, I use the APY's to find the best CD deals no matter what the length of the CD term is. You guys can use a divining rod if you wish.
anonymous
anonymous   |     |   Comment #60
I can't believe we even have a discussion about this here. Some simple truths:
1. Always compare investments of different term lengths by APY.
2. All investments have a 'correct' APY. Math is shown in the article above.
3. Yes, the 'rate' at which money is earned at 6 months is slightly less than APY. But do use APY if you're planning to reinvest the money. (A 1 year CD with the same APY will have earned exactly the same if you compare after 6 months!)
DummyInvestor
DummyInvestor   |     |   Comment #74
You need only one basic sentence to grasp compound interest: in addition to the interest earned on your principal invesment, the interest itself earns interest after it is credited to your account. The more times it is added to your account, the greater the compounding effect. So the interest earned for any period is added to your principal and from that point forward, the new, higher principal earns interest, and on and on until the investment matures or is redeemed.
deplorable 1
deplorable 1   |     |   Comment #20
Maybe you guys just need to hear it from someone else. Ken help me out here.
https://www.ally.com/do-it-right/banking/apy-vs-apr-what-is-apr-what-is-apy/
deplorable 1
deplorable 1   |     |   Comment #22
Ok all the banks in the world are wrong when they post the APY's for odd term CD's guys. That is what you are saying when you are telling me I'm wrong. I give up. I did give it a try but some folks will obviously never get it.
Jones
Jones   |     |   Comment #23
deplorable 1, please explain to us, why on a 1 (one) month CD APR=APY, maybe that will give you a hint. The interest earned on less than one year term CD, is always less than the quoted APY and that is the real TRUTH. Calculators are useless because they assume, as you do, that the CD will continue to one year and not stop half way through or anywhere in between.
Another question, if the calculation do apply to one month CD, how is the APY calculated and why. I'm trying to help you understand the differences in calculations. Another hint, the APY is recalculation of the newly added interest and is exponential accounting, which means most of the interest on the interest is earned at the end of the CD period and not upfront. I hope you will understand that and close this case.
deplorable 1
deplorable 1   |     |   Comment #24
This is where the confusion lies. I'm not disputing actual interest earning calculations. When you are comparing various odd term CD's the APY is there so that you can quickly and easily decide which CD has the best rate. No calculations are necessary. Here are 3 odd term CD's
1. 6 month 3% APY
2. 17 month 3.1% APY
3. 9 month 3.25% APY
Which CD has the best rate? Answer #3. See no calculation required and that is the point so you can compare apples to apples. Now if you did the calculation the 17 month CD would earn more actual dollars but my money would be in the 9 month CD getting a better rate. Then I would re-deploy those funds again after the CD matures. It's not rocket science.
Brokered
Brokered   |     |   Comment #43
#24
Your assumption that you could profitably redeploy money at the end of the 9-month CD is uncertain. If rates drop past a certain point the guy with the 17-month 3.1% CD will beat your pants off.
deplorable 1
deplorable 1   |     |   Comment #46
@Brokered: I'm making no assumptions other than I am getting the best possible rate for that 9 months. I could do better after that term or worse it matters not. The only assumption I'm making is that it definitely won't be earning 0% when the CD matures.
deplorable 1
deplorable 1   |     |   Comment #25
To answer your question though assuming monthly compounding there is no compounding on the one month CD hence the APR and APY would be the same. You don't think I understand compounding?
Smarty
Smarty   |     |   Comment #27
deplorable 1, this is where you are wrong, for the APY to be true, there must be at least 12 interest payments, anything less than that, your APY is wrong and that is the mathematical rule for APY. Stop bitting around the bush with irrelevant comparisons, you finally understood that one month CD has no APY, now 6 month CD has only 6 compounds (out of 12 needed for the APY to be correct) and the other six are missing, therefore, the APY quoted for 6 month CD is wrong on any CD out there, (it is a fictitious number to fool the gullible persons who can not calculate for themselves). The banks technically are not lying, they just do not disclose that 6mo CD's APY is less then the annual CD's APY.
AGAIN the "A" in APY stand for annual or 12 compounds of interest credited, see, nothing to be confused about.
HighYield
HighYield   |     |   Comment #29
I have several 6-month CDs. And 1-yr CDs. I'm glad they have those calculators. It tells me exactly how much interest I will earn. That's good enough.
Dan Coates
Dan Coates   |     |   Comment #37
Why can't you guys understand the concept of APY? Deplorable 1 has correctly stated it over and over again.
deplorable 1
deplorable 1   |     |   Comment #44
Thanks Dan! It's like I'm in the Twilight Zone over here.
Sumter
Sumter   |     |   Comment #38
deplorable 1, you still do not get it, APY is wrong on all CDs with terms of less than 12 months. There is nothing to discuss, you are wrong. The APY is correct on all CDs with 12 months +. How many posters said the same thing, only you are resiting the truth of APY. Try to prove your point with 3 month CD if your calculations are correct. If you still do not believe, open a 3 mo CD and wait to be paid in full as per your calculations and you will find out, you always will get the short end when real money are deposited in your CD at the end of 3,6 or 9 months CDs.
Jess
Jess   |     |   Comment #39
#36, are you trying to persuade yourself or the rest of us. Any CD with less than one year term, have misleading APY. Why, because it is called Annual Percentage Yield (APY) and not a monthly or semi annual or anything in between Yield. If you calculate individual months Yields, you will end up less then APY for any term of less then a year. And that is the story about the APY. Any CD with term of over a year is compliant with the APY, because the APY from the previous year carries over to the next month(s) in the CD, whether it is 13 months or 1033 months makes no difference.
deplorable 1
deplorable 1   |     |   Comment #41
It does not matter the term of the odd CD it could be under a year or over a year or over 2 years the stated APY is still correct for whatever the term is. You just take the APY and divide it by 12 then multiply that number by how many months the CD is for. Just because a CD is not in even years does not make the APY incorrect. The whole point of it is to compare various CD's with different terms and compounding frequencies. A apples to apples comparison.
Lotty
Lotty   |     |   Comment #54
deplorable 1 on your comment #41, WRONG assumption, CDs under a year have an incorrect APY and that is the fact. The APY is assumed for the whole year of the CD. Compare your private hand calculation with the posted bank APY and that will tell you the difference.
deplorable 1
deplorable 1   |     |   Comment #56
@Lotty: Then you should call all the banks and credit unions tell them that they are wrong and are posting inaccurate APY's for all CD's under a year. As soon as they stop laughing I'm sure they will get right on it.
anonymous
anonymous   |     |   Comment #62
I really hope that those of you insisting that CDs under a year have an 'incorrect APY' are just trying to troll DP1. Perhaps you can make an argument that banks like to quote the 'higher rate' (APY as opposed to APR) to make the CD look better, but that argument basically ends there.

In fact, APRs can be more confusing, because what you receive at the end depends on the compounding method. Daily? Monthly? Continuous? These would all be different APRs for the same amount of money you'd receive at maturity. The only thing they'd have in common is the APY.
deplorable 1
deplorable 1   |     |   Comment #67
Thanks anonymous great comments! I can't imagine that there are that many trolls on here. At least I hope not. I agree that when doing the math with APR's you can come up with different numbers due to rounding and compounding frequency etc. I have also seen banks that have APR's that don't correlate to the advertised APY. I can totally understand how this can be a confusing concept. I thought that DA would be the best place for this discussion since it has a direct bearing on all deposit accounts. I was just trying to help explain it better but it looks like I just made people angry and then I get frustrated trying to explain it.
SMH
SMH   |     |   Comment #30
Hard to believe, and sorry to see, that this site has evolved into this type of banter.
RJM
RJM   |     |   Comment #40
Look what my Keesler CD says:

APY:
5.074%
Date Opened:
08/17/18
Account Name:
7 MONTH SHARE CERTIFICATE
Last Dividend Earned:
$0.00
Previous Year Dividend Earned:
$0.00
Dividend Rate:
4.950%
YTD Dividend Earned:
$0.00
Account Type:
7 MONTH SHARE CERTIFICATE
deplorable 1
deplorable 1   |     |   Comment #42
That APY looks correct using daily compounding. They have actually been depositing the interest to your account though right?
deplorable 1
deplorable 1   |     |   Comment #47
lol right. Hey I wouldn't say anything according to my calculator the APR and APY look correct if it's compounded daily and 5.07% beats 5%. I wish I could go back in time and pick that CD up. Good job snagging that one. Plug in the rate or the APY here:
https://www.omnicalculator.com/finance/apy
RJM
RJM   |     |   Comment #52
I and a lot of others are hoping for something competitive when it matures. No evidence of that yet. But, I am keeping $10k aside just in case they ask for "new money".

NASA always asked for $5k new money but went to $10k.

I am not expecting a 5% deal but maybe something relatively competitive for the time period they want.

The reason I think its at least possible is they did not have to open up that 5% deal to everyone. That suggested they wanted deposits and new members. Hard to believe they will want all that money quickly removed.
111
111   |     |   Comment #66
RJM - Hopefully you're right and their renewal or successor rate will be decent. But I'm trying to make appropriate plans for whichever direction they go.

Two things that make me wonder whether they'll be able to come up with something competitive (although almost certainly not 5%), are -
1) 7 months is an odd term, which maybe hints at a "special project" kind of thing, not so much a general collection of funds to allow them to make a large number of smaller loans for the next "x" number of years, and,
2) Someone in that Keesler thread actually said they'd talked to a Keesler CSR who said the funding was for "some kind of project they were doing in Jackson, Miss.". That project may or may not have a Phase 2, Phase 3, etc.

Plus, remember what the interest rate environment expectations were back in August. Let's just say they were "different".
RJM
RJM   |     |   Comment #68
We are about a month away. The Andrews 3.25% 6 month will be gone since it only lasts a week. I am buying one with most of my available funds on 2/25.

What else do you have in mind?

If Keesler or some FI where I already have an account does not come up with something good, I guess I am willing to park it in my 2.50% checking at Northern for up to a month.

But, I feel sure that something will come up within the next 2 months.

If not, I might just invest a good chunk in stocks. I feel I have been underinvested for well over a decade given my age & risk tolerance.

Maybe one of us should try to get a big wig on the phone at Keesler? Or at least the Jackson branch manager.
111
111   |     |   Comment #70
I'll probably call Keesler around the beginning of March and ask what they know yet about renewal rates or other options, but I suspect the answer will be "we don't know yet - try closer to the maturity date".

If Keesler offers only poor choices, I have a "rate-insurance" add-on CD at Navy, but it caps out at only 50K (and I know they have membership restrictions). I've been actively looking for other add-on CDs with higher caps, but they're rare. There's that Mountain America one but it's capped at 100K. Also maybe NASA, though I would have to join, etc.

Yes, there's Northern (by the way, their higher rate of 2.5% is also guaranteed through June, just as the lower rate was). Then there's that Susquehanna "CD-like" liquid account at 3%, 6 months.

Dunno. Frankly, I wouldn't mind seeing a good fast market decline now. It might provide clarity, a buying opportunity, and make my choices easier! (LOL)
Brokered
Brokered   |     |   Comment #48
If people are enamored by this topic I suggest reading up on the variations of 360 and 365 interest calculations and how interest is paid to the account. Monthly interest payments usually vary with the days of the month so be careful when discussing interest unless you know how it's actually computed. A bank may compound daily accrue and then pay monthly, quarterly, yearly or end of term (e.g. 7-month CD). Maybe they compound monthly or quarterly. It's all in the details. APY is a standardized measure of a 12-month interest cycle and, as such, forms a basis for decision making. It exists to ease the confusion among various interest rate calculations.

Use APY and just forget APR entirely. It's YIELD that matters.
Accrue does not mean paid. If you're exiting a CD before maturity you may not see the accrued interest when you cash-out. Check with the bank.
CD's are usually buy/hold instruments. Why all the angst?
Go fishing, sailing, skiing, or take a nap.
deplorable 1
deplorable 1   |     |   Comment #49
You are right Brokered and that's the bottom line just use the APY as that is what it was created for. Then you don't even have to worry about the compounding frequency or the term.
Brokered
Brokered   |     |   Comment #50
#48
360/365 apply primarily to bank loans but it's fun to understand.
And let's not forget the leap year problem when we have 366 days!
How many days in a year?
Human says 365, programmer says 365.25 unless it happens to be a leap year in which the answer is 366 because we have to get rid of those accumulated 1/4 days somehow!

Stick to APY and leave the programming to the programmers.
deplorable 1
deplorable 1   |     |   Comment #51
If I'm calculating daily compounding I just use 365 days or better yet just plug the numbers into a good calculator. Some calculators are very basic and won't do daily compounding just monthly.
CDexpert
CDexpert   |     |   Comment #59
If not specifically disclosed from the banks, all CDs compound monthly.
CDexpert
CDexpert   |     |   Comment #58
All CDs are quoted with their annual rates of return. If the CD closes in less than a year, you never get the quoted APY, but a fraction of it and that is a fact. All quoted APYs for less than a year CDs are misleading.
ccx88
ccx88   |     |   Comment #61
APY is a 'benchmark' OF 12, it is not 'benchmark' = 12
QED
QED   |     |   Comment #63
To Brokered #50

I understand where you're coming from with APY. And I agree that when choosing a CD you use APY in order to make apples-to-apples comparisons between competing CDs.

However, do not be too quick to advise ignoring APR in other circumstances. For example, when checking whether or not I have been paid the right amount of interest I very often must find, and use, the APR number for the account I'm checking. APR does have relevance and usefulness, but of course not for bank-to-bank account comparisons.

On a personal note, years ago (pre-internet) back in my bond days I needed constantly to know the YTM (yield to maturity), or sometimes the YTC (yield to call), of the individual bonds I was considering buying.  Sometimes I had to calculate these numbers for myself, and quickly.  I also needed to be able to check for accuracy the YTM and YTC numbers being provided me by brokers, such calculations being more complex than those related to CD interest.  Thank goodness for Texas Instruments and their BA-II Plus calculator.  Mine never let me down.  I still have my BA-II Plus and it still works, though I no longer have any use for it.  :-)
Barry
Barry   |     |   Comment #64
Correctly stated QED, APY should not be used for CD with less than a year, APR is much more accurate because you can see from it the real numbers and not compounded imaginary yield (if held for one year). Short term CDs are never renewed or held for more than the original term, because the new or renewed APR is always lower than the original CD.
anonymous
anonymous   |     |   Comment #65
#64, this same assertion about short-term CDs has been stated several times here now. But please do explain, if you compare these investments with the same APY:
1. What return do you get from your savings account after 6 months?
2. What return do you get when you break a no-penalty CD after 6 months?
3. What is your account balance on your 1-year CD, 6 months after account opening?

Right. Exactly the same as the 6 month CD with the same APY.

Nothing magical about the term length. Of course, you could argue that you have reinvestment risk. But with any fixed income investment, you ALWAYS have reinvestment risk. Let's look at a 2-year CD with 3% APY, for example. Is there a risk that your return over 5 years might be lower than 3%? Of course! Does it mean that the 2-year CD has an 'incorrect APY'? Of course not! It's your responsibility to understand the term length of your investment choices.
deplorable 1
deplorable 1   |     |   Comment #69
You are 100% correct anonymous! That's a great way to explain it Take a one year CD and break it after 6 months. Was the APY the same? Yes Was the APY correct? Yes!
larry
larry   |     |   Comment #72
Comment #63 Cool, I used one of those BA-II Plus calculators also in my real estate and finance class all the time and still have it!
lbc3000
lbc3000   |     |   Comment #71
It's very simple ...divide the APY by 12 to determine how much interest you will get per month or divide bY 365 to get per day

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