APR (Annual Percentage Rate) and APY (Annual Percentage Yield) differ primarily in how they account for interest.
APR measures the annual interest rate without considering compounding effects, calculating simple interest. For example, with a 10% APR on a $100 deposit, you'd earn about $0.0274 per day ($100 * 10% / 365), totaling $10 over the year.
In contrast, APY includes the effect of compounding interest. For the same 10% APR, the daily interest rate would be approximately 0.0274%. With daily compounding, this results in an APY of about 10.52%, so the $100 deposit would grow to approximately $110.52 over the year, earning around $10.52.
Compounding means you earn interest on both the initial deposit and the accumulated interest from previous periods. Thus, while APR represents the cost or earnings of simple interest, APY reflects the total interest earned, including compounding, leading to slightly higher earnings.
Both can be calculated daily, but APY’s calculation includes the compounding effect, unlike APR.
