APR to APY Converter
APY to APR Converter
What is Annual Percentage Rate (APR)?
Annual Percentage Rate (APR) is the interest rate that is contracted on a certificate of deposit (CD).
A CD with an APR of 12% that is compounded monthly will receive interest of 1% of its value (12% divided by 12 months) every month.
Each time the interest for the CD calculated, the original investment as well as the accrued interest is used to determine how much interest is added in each period.
What is Annual Percentage Yield (APY)?
Annual Percentage Yield (APY) is average yield of the investment over it’s lifetime as if it was paying out interest.
It is a way of quickly seeing the return adjusted for compounding.
For example, a CD with an APY of 12% would earn an average of 12% of the time of the investment.
Generally APY is not listed in the contract of the CD. APY is often used in CD marketing and advertising as it usually appears to be a higher number than the APR.
What are months?
Months are the amount of total time that the investment is held in the CD.
Most CDs are invested in a period of years, however there are some that are invested for shorter terms (or partial years).
What is the annual interest rate?
This is the interest rate that is earned annually on the deposit.
The annual interest rate is different than the annual percentage yield (APY).
What is the compounding period?
The compounding period is how frequently the account is updated with each interest deposit.
Shorter compounding periods typically yield more interest over the term than longer compounding periods with the same interest rate.
Sources and External Resources
- Wikipedia – Time Deposit
- Wikipedia – Certificate of Deposit
- FDIC – Insured or Not Insured?
- SEC – High Yield CDs – Protect your money by checking the fine print
- FDIC – Thinking of buying a CD? What to consider before handing over your money