Published in Passive Income
Image credit by Lily Georgia
Ishikawa Hinata
Product Lead
September 28, 2024
Understanding Annual Percentage Yield (APY)
Annual percentage yield vs Interest Rate: Which one offers you the best?
Saving is amazing! Investing is even better!
Many people want to do it, but only a few know exactly how to go about it and a basic aspect of investing is understanding APY or annual percentage yield and how it differs from interest rate.
Key Takeaways
APY is the rate at which your investments will generate yield annually
Interest rate is the rate at which your investments will grow or the rate at which you will be charged for a loan
APY is a term often used in crypto, whereas interest rate is used in TradFi.
Investing in crypto yields higher returns than traditional finance instruments like banks and government bonds, but it also comes with increased risks. Thus, understanding the interest rates and risks of each platform is crucial to investing in crypto.
What is interest rate?
Interest rate or simple interest is either the rate at which your investments will generate returns or the rate at which you will be charged for a loan.
What is Annual Percentage Yield or APY?
APY is the rate at which your investments will generate returns annually. It determines how much money you will earn based on the amount invested, in a year.
What is the formula to calculate APY?
The formula for APY (Annual Percentage Yield) is:
APY = (1 + r/n)^(n) - 1
Where:
r is the annual interest rate.
n is the number of compounding periods per year.
If this seems complicated, don't worry, there are many online APY calculators you can use once you have the necessary details.
Now that we have established the basics, let's see how interest rate and APY differ.
Annual Percentage Yield vs Interest Rate: What is the difference?
The main difference between the two is that APY isn’t applicable for loans. Interest rate is used for both loans and investments.
However, institutions sometimes offer an option to compound your investments, and in such cases, the APY will change accordingly.
APY vs APR: What is the difference?
APR or Annual Percentage Rate is also used to measure interest rates; however, APR is the simple annual interest rate charged on a loan including any additional fees associated with the loan.
Read this blog to learn more about APR.
The Bottom Line
Always consider the APY and other details before investing. And if earning high yield in crypto is your thing, then check out Multipli fi - it is a yield-generation platform that employs minimal-risk trading strategies to earn high APY of up to 25% on your stablecoins and RWAs. Learn more about Multipli fi here.
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