APR vs APY
Also called: APR · APY · annual percentage rate · annual percentage yield
Definition
APR is the simple annual rate of return or interest without compounding, while APY includes the effect of reinvesting earnings, so APY is higher than APR whenever returns compound.
This entry is shown in English.
How APR vs APY works
APR, annual percentage rate, multiplies a periodic rate by the number of periods in a year. APY, annual percentage yield, assumes each payout is added back and earns returns of its own. The formula is APY equals (1 plus APR divided by n) to the power of n, minus 1, where n is the number of compounding periods.
The difference grows with higher rates and more frequent compounding. At 5 percent APR, daily compounding gives about 5.13 percent APY. At 100 percent APR, daily compounding gives about 171 percent APY, a number that looks much more exciting.
Crypto platforms use both terms, sometimes inconsistently. Check which one is shown, whether compounding is automatic, whether the rate is fixed or variable, and what currency the reward is paid in. A variable rate shown as APY assumes it stays the same all year, which is rare.
Example
Suppose a product pays 12 percent APR on 1,000 USDT with daily payouts. Without reinvesting, you earn 120 USDT in a year. If each day's interest is added to your balance, APY is (1 plus 0.12 divided by 365) to the power of 365, minus 1, about 12.75 percent, so you end with about 1,127.47 USDT. The extra 7.47 USDT comes only from compounding.
Common mistakes
- Comparing one product's APY with another's APR as if they were the same measure.
- Assuming a high variable APY will hold for a full year.
- Forgetting that rewards paid in a different token add price risk to the stated rate.
FAQ
Is APY better than APR?
Neither is better; they measure different things. For the same underlying rate, APY is higher because it includes compounding.
How do I convert APR to APY?
Use APY equals (1 plus APR divided by n) to the power of n, minus 1, where n is how many times per year earnings compound.