What is APY, what is the difference from APR?

APR (Annual Percentage Rate) is the annual interest rate that shows how much you will pay or earn on your investments or debts over a year without considering compound interest. For example, if you invest $10,000 at 20% APR, after one year, you will earn $2,000 in interest, making your total balance $12,000.

APY (Annual Percentage Yield), on the other hand, includes compound interest, meaning it accounts for the interest earned on previously accumulated interest. This makes APY a more accurate measure of real returns. For instance, with the same $10,000 investment at 20% APR but with monthly compounding, your balance at the end of the year would be $12,429.

The main difference is that APR does not account for compound interest, while APY includes it, providing a more precise picture of actual earnings. The more frequently the interest is compounded, the higher the APY will be compared to APR.