What is APR? What is APY? What are the differences between APR and APY?
APY (Annual Percentage Yield) is a measure of the interest rate expressed annually, reflecting the compound interest effect of an investment. APR (Annual Percentage Rate) represents the annual interest rate of the investment but does not include compound interest, so APY generally provides investors with a more realistic return estimate. Cryptocurrencies have become an attractive option for investors in recent years. While there are many different investment options in this area, APR (Annual Percentage Rate) is an important metric that investors use to calculate their returns. APY stands for Annual Percentage Yield. APY is a similar concept to APR, but with one difference: APY also takes into account the effect of compound interest.
What is APR?
APR represents the annual interest rate or rate of return on an investment. In the cryptocurrency world, APR is used for various investment instruments such as staking, liquidity provision (LP) and yield farming. Simply put, APR tells you how much you can expect to earn over the course of a year.
How to Calculate APR?
The formula used to calculate APR is:
APR = (Interest / Principal) * 365
Here, interest is the profit you earn from your investment and principal is the amount of cryptocurrency you use to invest.
Importance of APR
APR is a useful tool for comparing different investment instruments. An investment that offers a higher APR may generate greater returns. However, it is important to remember that APR alone does not determine the profitability of an investment. Before investing, you also need to consider risks and other factors.
Things to Consider When Using APR in Crypto:
Note that APR does not take compound interest into account.
Thanks to compound interest, your earnings grow over time.
Compare APR rates offered on different platforms.
The platform that offers the highest APR may not always be the best option.
Research the reliability of the platform before investing.
Beware of the risk of fraud.
Consider market risks.
The cryptocurrency market is highly volatile and the value of your investment may decrease.
What is APY?
APY stands for Annual Percentage Yield. It represents how much profit an investment will generate over the course of a year, taking into account the effect of compound interest.
How to Calculate APY?
The formula used to calculate APY is:
APY = (1 + Interest Rate/Number of Compound Interest Periods)^Number of Compound Interest Periods – 1
Here:
Interest Rate is the annual interest rate of the investment.
The Number of Compound Interest Periods indicates how often interest will be calculated.
Importance of APY
APY is an important metric for investors to more accurately compare different investment instruments. Because it takes into account the effect of compound interest, APY gives you a clearer picture of how much you'll actually earn.
What are the Differences Between APY and APR?
APY (Annual Percentage Yield) and APR (Annual Percentage Rate) are two important interest rate concepts used in financial products. Although they may seem similar at first glance, there is one important difference between them: compound interest.
APR:
It represents the simple interest rate.
It does not take into account compound interest.
It has a simpler calculation method.
It is often used in loans and credit cards.
APY:
It represents the compound interest rate.
It also takes into account the fact that interest earns interest.
It has a more complex calculation method.
It is often used in savings accounts, investment funds, and cryptocurrency instruments such as staking.
APY and APR Comparative Example
Now let's examine it with an example.
Investment: $10,000
Interest Rate: 10%
Duration: 1 Year
Calculation with APR:
Interest earned in one year: $10,000 * 10% = $1,000
Total amount: $10,000 + $1,000 = $11,000
Calculation with APY:
Number of compound interest periods: 12 (monthly)
APY: ((1 + 0.1/12)^12) – 1 = 0.10471
Interest earned in one year: $10,000 * 0.10471 = $1,047.10
Total amount: $10,000 + $1,047.10 = $11,047.10
As can be seen, when we calculate using APY, we can see that we will earn $47.10 more after one year.
Now let's examine it with another example:
Investment: $10,000
Interest Rate: 10%
Duration: 3 Years
Calculation with APR:
Interest earned in one year: $10,000 * 10% = $1,000
Interest earned in three years: 3 * $1,000 = $3,000
Total amount: $10,000 + $3,000 = $13,000
Calculation with APY:
Number of compound interest periods: 12 (monthly)
APY: (1 + 0.1/12)^12 – 1 = 0.10471
Interest earned in one year: $10,000 * 0.10471 = $1,047.10
Interest earned in three years: 3 * $1,047.10 = $3,141.30
Total amount: $10,000 + $3,141.30 = $13,141.30
As can be seen, when we calculate with APY, we can see that we will earn $141.30 more after three years.
As we see in the examples, APY is always higher than or equal to APR. Because it takes into account the effect of compound interest, APY gives you a clearer picture of how much you'll actually earn. Before investing, you can choose the most profitable investment by comparing the APR and APY rates offered by different platforms.