APY and APR: what's the difference?

Осторожно! Много текста
Chances are you've come across the terms APY and APR while researching decentralized finance (DeFi) products.
The annual percentage yield (APY) takes into account interest compounded quarterly, monthly, weekly or daily, but the annual percentage rate (APR) does not. This simple difference can significantly change the calculation of returns over a given period. Therefore, it is important to understand how these two metrics are calculated and how they impact digital revenue.
APR and APYAPR and APY are key concepts in personal finance. Let's start with a simpler term: annual percentage rate (APR). This is the interest the lender earns on their money over a one-year period and is paid by the borrower.
For example, if you put $10,000 in a savings account at a bank with an APR of 20%, after one year you will earn $2,000 in interest. They are calculated by multiplying the principal amount ($10,000) by the APR rate (20%). So in one year you will have $12,000. In two years you will have $14,000. In three years you will have saved $16,000, and so on.
Before we get into annual percentage yield (APY), let's understand what compound interest is. Simply put, it is earning interest on previous interest. If the financial institution in the example above pays interest to your account monthly, your balance will look different during each of the twelve months of the year.
Instead of receiving $12,000 at the end of the twelfth month, you will receive a portion of the interest each month. This interest is added to the principal amount of your deposit, so the amount you earn interest on increases every month. Every month your earnings will increase. This is how compound interest works.
Let's say you deposit $10,000 into a bank account with an APR of 20% and interest accrues monthly. Without getting into the complicated math, you'll end up with $12,429 at the end of the year. That's $429 more simply due to compound interest. How much would you earn with an APR of 20% and compounding daily? In total you would receive $12,452.
The effect of compound interest is best seen over long periods of time. The same 20% APR with daily interest would yield $19,309 after three years. That's $3,309 more than the same product with a 20% APR without compounding.
By adding compound interest, you will earn much more on your investment. Please note that interest varies depending on the frequency of accrual: the more often, the more earnings. Daily accrual will bring more interest than monthly accrual.
How to calculate the income from a product with compound interest? This is where annual percentage yield (APY) comes in. Use the special formula to convert APR to APY based on accrual frequency. For example, an APR of 20% compounded monthly equals 21.94% APY. If compounded daily, it will be 22.13% APY. These numbers represent the annual percentage return you earn after taking into account compound interest.
In general, the APR (annual percentage rate) is simpler and more static: it remains fixed. But APY (Annual Percentage Yield) includes interest compounded on interest, which is compound interest. It varies depending on the frequency of accrual. To learn the difference, remember that “profitability” is a more complex concept (and more profitable).
How do you compare interest rates?From the example above, you can see that when you add up interest, you can get more interest. Rates for various products may be in the form of APR or APY. Because of this difference, it is important to use the same term for comparison. Be careful when comparing products as you may be comparing apples to oranges.
Products with a higher APY will not necessarily earn more interest than products with a lower APR. You can easily convert APR and APY using online tools as long as you know the accrual frequency.
The same goes for DeFi and other types of crypto products. When considering products with crypto APY and APR, such as crypto deposits and staking, be sure to convert them so you can compare apples to apples.
Additionally, when comparing two DeFi products by APY, make sure they have the same accrual periods. If they have the same APR, but one is calculated monthly and the other daily, then the daily option may earn more crypto interest.
Another important point to pay attention to is the APY value for the specific crypto product you are considering. Some products use the term "APY" to refer to the rewards that can be earned in cryptocurrency over a selected period of time, rather than the actual or projected income/return in any fiat currency. This is an important distinction because crypto asset prices can be volatile and the value of your investment (in fiat terms) can go down as well as up. If crypto asset prices drop sharply, the value of your investment (in fiat terms) may be less than the original fiat amount you invested, even if you continue to earn APY in crypto assets. It is therefore important to review the product's terms and conditions and do your own research to understand the investment risks and what APY means in a specific context.
SummaryAPR and APY can be confusing at first, but they are easy to differentiate if you remember that annual percentage yield (APY) is a more complex metric with compound interest. Because interest accrues on interest, the APY is always higher if interest is compounded more than once a year. Always check the product rate when calculating the interest you will earn.
Risk Warning and Disclaimer: The following materials are provided “as is” without warranty of any kind for general reference and educational purposes only. This information should not be considered financial advice or a recommendation to purchase any specific product or service. For more detailed information please follow the link. The value of digital assets may be volatile and the value of the funds invested may go up and down. You may not get your invested funds back. You are solely responsible for your investment decisions. Binance is not responsible for your possible losses. This information does not constitute financial advice. To learn more, please read our Terms of Use and Risk Disclosure.