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I'm curious as to what the difference between the Interest Rate and Annual Percentage Yield is.

For example: This Bank I was looking at offers 0.45% interest rate on savings account balances over $100,000. It also has an APY of 0.45% on balances >$100,000.

I'm not interested in opening a savings account with $100,000+ for 0.45% so I'm not looking for feedback on whether that's a good idea or not, I'm just curious as to when they numbers are different, and why. I know they can be different with government bonds, but I would like a simplified example.

DukeLuke
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1 Answers1

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The simple answer: Your APY is earnings from interest normalized over one year.

Interest can be simple or compounding at different rates (daily, monthly, quarterly). An APY is an attempt to provide a normalized yield value that can more easily be compared across different interest products.

As a bonus, APR is the annualized rate of compounding, but does not take into account the actual effect of compounding. Be sure you are comparing apples to apples, especially with loans. APR will be a lower number than APY.

Read more here

http://www.investopedia.com/articles/basics/04/102904.asp

jkuz
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