Comments on: Don’t get caught misunderstanding the difference between APR and APY http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/ Because you shouldn't need an MBA to be savvy about finance and business Thu, 09 Feb 2012 01:13:00 +0000 hourly 1 http://wordpress.org/?v=abc By: CD Rates http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-226118 CD Rates Tue, 26 Jan 2010 20:23:54 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-226118 Thanks for the info. So basic, but so easily misunderstood! I know alot of my friends who need to know the difference too! Thanks for the info. So basic, but so easily misunderstood! I know alot of my friends who need to know the difference too!

]]> By: Leslie http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-220934 Leslie Tue, 08 Sep 2009 00:02:14 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-220934 @Andy: Not sure I understand your comment. APR and APY are not the same thing. The two rates say the same thing, and $100 at the end of a year at 5.6% APR is the same thing as $100 at 5.76% APY. However, APR does not equal APY. Did I misunderstand your comment? @Andy: Not sure I understand your comment. APR and APY are not the same thing. The two rates say the same thing, and $100 at the end of a year at 5.6% APR is the same thing as $100 at 5.76% APY. However, APR does not equal APY. Did I misunderstand your comment?

]]> By: Andy http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-220933 Andy Mon, 07 Sep 2009 22:38:42 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-220933 You've confused APR (the annualized rate whcih is identical with APY) with the periodic rate. this in *incorrect* APY = (1 + APR/n)^n – 1 but this *is* correct: APY = (1 + 5.6%/365)(365) – 1 = 0.05759314 or 5.76%\ APR = APY = (1 + periodic_rate / n)^n – 1 where n = number of periods per year, and periodic rate is the rate per period. The whole point of the authors post is to avoid confusion between PERIODIC rate and ANNUAL rates (rates/yields, are apples to apples. accounts which pay you get APY's, accounts which pay the bank get APR's, but rate-wise, they are the same.) You’ve confused APR (the annualized rate whcih is identical with APY) with the periodic rate.

this in *incorrect*
APY = (1 + APR/n)^n – 1
but this *is* correct:
APY = (1 + 5.6%/365)(365) – 1 = 0.05759314 or 5.76%\

APR = APY = (1 + periodic_rate / n)^n – 1
where n = number of periods per year, and periodic rate is the rate per period.

The whole point of the authors post is to avoid confusion between PERIODIC rate and ANNUAL rates (rates/yields, are apples to apples. accounts which pay you get APY’s, accounts which pay the bank get APR’s, but rate-wise, they are the same.)

]]> By: mahesh http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-186260 mahesh Mon, 20 Oct 2008 22:53:24 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-186260 ur examples really cleared my confusion.thanks so much ur examples really cleared my confusion.thanks so much

]]> By: 10 Savings Accounts http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-134642 10 Savings Accounts Tue, 05 Feb 2008 20:40:02 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-134642 <strong>Regular Savings Accounts...</strong> Christmas is over for another year and we are now nervously awaiting the arrival of the dreaded credit card bill due to hit the doormat any day now.... Regular Savings Accounts…

Christmas is over for another year and we are now nervously awaiting the arrival of the dreaded credit card bill due to hit the doormat any day now….

]]> By: John Clarke http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-99853 John Clarke Wed, 08 Aug 2007 14:04:30 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-99853 Are you sure about your following comment: Another example: I bought a 3-month CD from Schwab that earns 5.41% APY, but that doesn’t mean I’m going to get 5.41% of my investment at the end of 3 months, but only 1/4th of it, or 1.3525%. It seems to me, based upon the formula you give that you will not get the full 5.41% divided by 4. you will get the original apr of 5.35% divided by 4. the 5.41% is the compounded effect of the 5.35% for each quarter. Are you sure about your following comment:

Another example: I bought a 3-month CD from Schwab that earns 5.41% APY, but that doesn’t mean I’m going to get 5.41% of my investment at the end of 3 months, but only 1/4th of it, or 1.3525%.

It seems to me, based upon the formula you give that you will not get the full 5.41% divided by 4. you will get the original apr of 5.35% divided by 4. the 5.41% is the compounded effect of the 5.35% for each quarter.

]]> By: Chris Duncan http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-15810 Chris Duncan Thu, 21 Dec 2006 19:29:42 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-15810 Also, when comparing APRs and APYs, keep in mind your goals as an investor. If you need the monthly income (and the bank will pay monthly interest) then the APRs are what you want to compare. If you don't need the monthly income then compare APYs. For instance, Bank A can have a higher APY than Bank B because the compound more often. But Bank B could have the higher underlyning APR, and you wanted the monthly pay out, you would want to go with Bank B. Here is a simple way to estimate your monthly income (principal*APR)/12. Make sure you express the APR in its decimal form. 5.40% would be 0.054. Also, when comparing APRs and APYs, keep in mind your goals as an investor. If you need the monthly income (and the bank will pay monthly interest) then the APRs are what you want to compare. If you don’t need the monthly income then compare APYs.

For instance, Bank A can have a higher APY than Bank B because the compound more often. But Bank B could have the higher underlyning APR, and you wanted the monthly pay out, you would want to go with Bank B.

Here is a simple way to estimate your monthly income (principal*APR)/12. Make sure you express the APR in its decimal form. 5.40% would be 0.054.

]]> By: Ricemutt http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-13872 Ricemutt Mon, 11 Dec 2006 17:32:53 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-13872 Hi Liz, If I understand your question correctly, the APR is 5.4%, so to calculate APY (the amount you'd receive in one year), you'd use N = 12 since it's compounded on a monthly basis. So, APY = (1+0.054/12)^(12)-1 = 5.54%. If you want to calculate your actual return over 15 months, you need to make a slight change in the equation. In this case, the "n" you divide by would be different from the "n" in the exponent. You'd still be getting interest compounded monthly, but you'd get it for 15 months. So the equation would be: Your 15 month yield = (1+0.054/12)^(15)-1 = 6.97%. Meaning, if you invested $100 at the beginning of Month 1, by the end of Month 15, you should have $106.97 in your account. Hope that helps! Hi Liz,

If I understand your question correctly, the APR is 5.4%, so to calculate APY (the amount you’d receive in one year), you’d use N = 12 since it’s compounded on a monthly basis. So, APY = (1+0.054/12)^(12)-1 = 5.54%.

If you want to calculate your actual return over 15 months, you need to make a slight change in the equation. In this case, the “n” you divide by would be different from the “n” in the exponent. You’d still be getting interest compounded monthly, but you’d get it for 15 months. So the equation would be:

Your 15 month yield = (1+0.054/12)^(15)-1 = 6.97%. Meaning, if you invested $100 at the beginning of Month 1, by the end of Month 15, you should have $106.97 in your account.

Hope that helps!

]]> By: Liz http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-13865 Liz Mon, 11 Dec 2006 17:12:42 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-13865 This is SOOO helpful. I have one more question however. Say I invest $100 for 15months. My bank compunds monthly. and the APR is 5.4% WHat would I input for "N", the number of periods being compunded, when it's 15months? Would N=15? or N= (15/12)?? OR DO I compute my actual return as you've shown here(using N=12), than multiply by 125%? Thank you. This is SOOO helpful.
I have one more question however.
Say I invest $100 for 15months. My bank compunds monthly. and the APR is 5.4% WHat would I input for “N”, the number of periods being compunded, when it’s 15months? Would N=15? or N= (15/12)?? OR DO I compute my actual return as you’ve shown here(using N=12), than multiply by 125%? Thank you.

]]> By: Purchased my first 4-week T-bill on Treasury Direct | Experiments in Finance http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-5421 Purchased my first 4-week T-bill on Treasury Direct | Experiments in Finance Tue, 24 Oct 2006 22:18:00 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-5421 [...] This chart is based on data from Treasury Direct’s official auction results page. Keep in mind that “Investment Rate” is the same as APR, not APY. This week’s investment rates were 5.038% for the 28-day bill, 5.072% for the 91-day bill, and 5.132% for the 182-day bill, which are equivalent to APYs of 5.156%, 5.169%, and 5.198% respectively. [...] [...] This chart is based on data from Treasury Direct’s official auction results page. Keep in mind that “Investment Rate” is the same as APR, not APY. This week’s investment rates were 5.038% for the 28-day bill, 5.072% for the 91-day bill, and 5.132% for the 182-day bill, which are equivalent to APYs of 5.156%, 5.169%, and 5.198% respectively. [...]

]]> By: DON BLACKBURN http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-3828 DON BLACKBURN Fri, 06 Oct 2006 20:00:40 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-3828 THANKS FOR CLEARING UP THE DIFFERENT WAYS TO COMPUTE INTEREST. THANKS FOR CLEARING UP THE DIFFERENT WAYS TO COMPUTE INTEREST.

]]> By: The Scott English Show - » More How To’s then you Could Poke a Stick At http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-3611 The Scott English Show - » More How To’s then you Could Poke a Stick At Sun, 01 Oct 2006 04:56:28 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-3611 [...] Don’t get caught misunderstanding the difference between APR and APY by Ricemutt [...] [...] Don’t get caught misunderstanding the difference between APR and APY by Ricemutt [...]

]]> By: Cell Phone Know How » 343 How To Posts http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-3359 Cell Phone Know How » 343 How To Posts Tue, 26 Sep 2006 16:11:48 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-3359 [...] Don’t get caught misunderstanding the difference between APR and APY by Ricemutt [...] [...] Don’t get caught misunderstanding the difference between APR and APY by Ricemutt [...]

]]> By: CJCM and IT » Blog Archive » Problogger’s Group Writing Project http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-3358 CJCM and IT » Blog Archive » Problogger’s Group Writing Project Tue, 26 Sep 2006 16:01:07 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-3358 [...] Don’t get caught misunderstanding the difference between APR and APY by Ricemutt [...] [...] Don’t get caught misunderstanding the difference between APR and APY by Ricemutt [...]

]]> By: Chewing Pencils: Helping you make money from drawing cartoons! http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/comment-page-1/#comment-3316 Chewing Pencils: Helping you make money from drawing cartoons! Mon, 25 Sep 2006 12:44:22 +0000 http://www.experiglot.com/2006/09/18/dont-get-caught-misunderstanding-the-difference-between-apr-and-apy/#comment-3316 [...] Don’t get caught misunderstanding the difference between APR and APY by Ricemutt [...] [...] Don’t get caught misunderstanding the difference between APR and APY by Ricemutt [...]

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