Banking to Financial Freedom - Interest Rate is everything!
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Yahoo! Finance is a place that we can learn a lot about personal finance. Today I just read an article called “Interest Rate is Everything!†while I’m doing some research in Yahoo! Finance. So in this post I will share this article with you.
Overall, this article is about annual interest rate (APR) and annual percentage yield (APY) .
If you want to include saving account in your financial planning, then you must clear with the difference, so you can make a better decision. In conclusion, the main difference between APR and APY is APY is changing base on the frequency of interest paying and because of this, APY is having the power of compound interest. However, APR doesn’t have this feature.
Below is a Paragraph that will show you the difference between APR and APY:
Let’s say interest pays annually. A $10,000 investment will earn $500 in interest. ($10,000 x 5 percent x 1 year.) When an investment pays interest annually, its rate and its yield are the same.
The more frequently interest is paid, the higher the yield. That’s because the interest payment is credited to the CD and it starts earning interest along with the invested principal.
If the 5 percent CD paid interest semiannually, the six-month interest payment would be $250, ($10,000 x 5 percent x .5 years.) The $250 payment starts earning interest and earns $6.25 in interest during the next six months, ($250 x 5 percent x .5 years.) That’s what compounding interest is all about.
The first CD earned $500 in interest after a year and the second CD earned $506.25 in interest. The rate and yield on the first CD is 5 percent. The rate on the second CD is 5 percent, but its yield is 5.06 percent. If interest was paid daily, the rate would be 5 percent but the yield would be 5.13 percent.
Source : Yahoo! Finance
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