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APY 6%

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The calculation of interest earned in a year when taking compounding into it’s account. Many financial services like loans set the different interest rates. APY gives you an idea on how much interest will be accrued in a year when we take compounding into account. It can be a simple formula yet powerful formula in choosing financial offers.

For example, you have the following offers:

- Interest rate of 1% compounded yearly,
`APY = 1%`

- Interest rate of 0,7% compounded quarterly,
`APY = 0,702%`

- Interest rate of 0,5% compounded daily,
`APY = 0,501%`

You can conclude by seeing APY. Higher APY will accrue higher interest.

APY is calculated using the below formula where r is the annual interest rate and n is the number of compounding periods each year. People sometimes confuses APY with APR. APR refers to annual interest rate without taking compounding into it’s account.

Where:

APY = Annual Percentage Yield (APY)

r = Annual Percentage Rate (APR) as a decimal, e.g. 0.05 for 5%

n = Number of periods in a year