The Annual Percentage Yield
The definition of “Annual Percentage Yield” stands for the annual percentage yield and it signifies how well your own money is working for you. The Annual Percentage Yield is basically the effective annual return. The APY is calculated with one plus the periodic year raised to the number of periods in a year.
Most interest is compounded more than once in a year like monthly, weekly, daily, quarterly, or bi-monthly. So if you are going to a bank to open a savings account or making an investment make sure you inquire about APY any bank in that case will be happy to share the information as it will increase the chances of you settling with that bank.
People are most of the time very ignorant of the Annual Percentage Rateor they happen to confuse it with APR as it is not clearly mentioned in the brochures and literature on the financial institutions. Knowing well about APY can increase the earning that you get out of any investment. APY happens to be very different from APR; the former calculates the effective amount that you earn in a year on your investment while the latter just calculates the cumulative interest of that particular year. Let us take up an example:
Suppose you have opened a CD account with a $1000 amount and 5% interest rate. Then your APR for the year will be 5% and the amount that your bank account will be worth at the end of the year will be $1,050. Now if you are investing $1000 in a CD that is compounded more than once a year and has an APY of 5% the rate you will generate will be higher and so will be the effective amount.
The difference between an APR and APY may seem to be too small but when considered for a long period of time like 20 to 25 years it becomes a significant amount of money.
If you know about all the aspects of an APY and are well aware of the difference it makes to the profit you earn you will surely give it a considerable thought in each of your decisions. It is better to compare the APY of the banking services to know full well that which the bank offers the best profit margins.
It will help you knowing which deal is better when you are making a comparative study of the various packages offered by various banks. For example you have two banks and you are confused about whose offered deal is better since both have the same APR than comparing their APY will give you a final definite answer as the greater APY will earn you the greater interest and it will also prove to be beneficial for you in the long run to determine decision with the help of APY.
Most of the time it can happen that the brochures or the bank’s literature would not disclose the APY clearly in any such situation you should ask the financial institution in question about APY they will be happy to share the information.
You can with the help of understanding the definition of ‘Annual Percentage Rate – APR make your money work better for you. There will be a number of services at each bank with their own APY you can invest in them and earn effectively. Always invest in higher APY and you will be in profit.
Annual Percentage Rate