Annual Percentage Yield (APY) refers to the effective interest rate which is paid on an investment over the given period time based on the annual percentage rate. Annual Percentage Rate (APR) is the interest rate charged on the amount borrowed and it replicates the annual cost of borrowing money.
John borrowed 7% interest rate on his investment for 12 months then, what will be the John's Annual Percentage Yield?
APR = 7% = 0.07 Number of Period (n) = 12 months
Periodic Rate = APR / n = 0.07 / 12 Periodic Rate = 0.005833333 APY = (1+Periodic Rate)n - 1 = (1+0.005833333)12 - 1 = 1.072290077 - 1 = 0.072290077 APY = 7.229 %
Annual Percentage Yield is 7.229 %