APR and APY
Two ways of quoting an annual yield: simple (APR) or with gains compounded (APY).
The same rate, two figures
APR (annual percentage rate) is a simple annual rate: 12% APR means 1% a month with no reinvestment. APY (annual percentage yield) assumes every gain is reinvested: 12% APR compounded monthly gives 12.68% APY. A borrower prefers being shown the APR, a saver the APY.
APY = (1 + APR / n)n - 1
- n
- number of compounding periods a year.
Worked example
12% APR by compounding
- Yearly: 12.00%.
- Monthly: (1 + 0.01)^12 - 1 = 12.68%.
- Daily: (1 + 0.12 / 365)^365 - 1 = 12.75%.
Beyond monthly compounding, the extra gain becomes small.
Common mistakes
- Comparing one platform’s APY with another’s APR.
Questions and answers
What about the TAEG?
France’s TAEG is the loan equivalent: an annual rate including all mandatory fees, used to compare loan offers.
Notitia newsroom · education, not investment advice.