Financial Fellow

Written by J.P. Wicklein

     Ever checked out the interest rate on a CD or savings account and seen two different numbers?  Interest rates on deposits are often reported two ways:  The annual percentage rate (APR) and the annual percentage yield (APY).  So, what’s the difference? 

     The APR is the interest rate on your deposit.  For example, if you deposit $100 in a CD with a 2.50% APR, one year later that $100 will grow to $102.50.  During that time, though, the $2.50 you earn in interest will also earn interest.  So, using the example above you’ll actually earn more than $102.50.  Once you factor in the interest that your interest earns you’re looking at the APY.  As a result, the APY is always fractionally higher than the APR.

Photo by: ralphunden