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. For CDs (Certificates of Deposit), APY gives you the true picture of what you'll earn over a year.

2. How Does the Calculator Work?

The calculator uses the APY formula:

Where:

• \( r \) — Annual interest rate (in decimal form)
• \( n \) — Number of compounding periods per year

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

3. Importance of APY Calculation

Details: APY allows accurate comparison between different CD offers that may have the same nominal rate but different compounding frequencies.

4. Using the Calculator

Tips: Enter the annual interest rate (as a percentage) and the number of times interest is compounded per year (e.g., 12 for monthly, 4 for quarterly).

5. Frequently Asked Questions (FAQ)

Q1: Why is APY higher than the nominal rate?
A: APY accounts for compound interest - the effect of earning interest on previously earned interest.

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

Q3: What's the difference between APR and APY?
A: APR doesn't account for compounding, while APY does. APY gives the true annual yield.

Q4: Are there CDs with different compounding frequencies?
A: Yes, CDs can compound daily, monthly, quarterly, semi-annually, or annually - always check the terms.

Q5: Does APY change if I withdraw interest payments?
A: Yes, if you withdraw interest rather than letting it compound, your actual yield will be lower than the stated APY.