Education: Thing you Need to Know About Annual Percentage Yield (APY) and Annual Percentages Rate

Table of contents

· What’s APY?

· How does APY work in crypto

· How does APY work per month

· Factors That Influence Crypto APY

· What’s Annual Percentages Rate(APR)

· How the Annual Percentage Rate (APR) Works

· Disadvantages of Annual Percentage Rate (APR)

· Why Is the Annual Percentage Rate (APR) Disclosed?

What’s APY?

APY is the actual rate of return that will be earned in one year if the interest is compounded. Compound interest is added periodically to the total invested, increasing the balance. That means each interest payment will be larger, based on the higher balance.

APY is the annualized rate of return from an investment, factoring in compound interest that accrues or grows with the balance. Compound interest includes interest earned from the initial deposit, plus the interest earned on that interest.

How does APY work in crypto?

APY is an annualized yield. It’s calculated by taking the net difference in price from 7 days ago and today and generating an annual percentage.

The formula to calculate 7-day APY is as follows:

APY = (X — Y — Z) ÷ Y × 365/7

Where:

X = the price at the end of the 7-day period

Y = the price at the start of the 7-day period

Z = any fees for the week

This calculated amount helps investors to understand the weekly yield or return.

How does APY work per month?

APY refers to the amount of money or interest, you earn on a bank account over one year. … Simple interest doesn’t compound, so you earn the same amount of interest every month. Compound interest, meanwhile, is the interest earned on both the money you put into the account and the interest you receive overtime.

Factor That Influence Crypto APY

Majorly Inflation; Inflation refers to the loss in value of a currency over time. Within crypto, inflation refers to the process of adding new tokens to the blockchain network, usually at a predetermined rate. The appeal of cryptocurrencies such as Bitcoin is that they’re designed to have predictable and low inflation rates.

The rate of inflation for a particular network affects the staking returns. If your coin experiences inflation rates higher than your APY, then your earnings are eroding just as quickly as you’re adding them.

What Is Annual Percentage Rate (APR)?

Annual percentage rate (APR) refers to the yearly interest generated by a sum that’s charged to borrowers or paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment. This includes any fees or additional costs associated with the transaction, but it does not take compounding into account. The APR provides consumers with a bottom-line number they can compare among lenders, credit cards, or investment products.

How the Annual Percentage Rate (APR) Works

An annual percentage rate is expressed as an interest rate. It calculates what percentage of the principal you’ll pay each year by taking things such as monthly payments into account. APR is also the annual rate of interest paid on investments without accounting for the compounding of interest within that year.

The Truth in Lending Act (TILA)of 1968 mandated that lenders disclose the APR they charge to borrowers.1 Credit card companies are allowed to advertise interest rates on a monthly basis, but they must clearly report the APR to customers before they sign an agreement.

If you only carry a balance on your credit card for one month’s period, you will be charged the equivalent yearly rate of 22.9%. However, if you carry that balance for the year, your effective interest rate becomes 25.7% as a result of compounding each day.

Disadvantages of Annual Percentage Rate (APR)

The APR isn’t always an accurate reflection of the total cost of borrowing. In fact, it may understate the actual cost of a loan. That’s because the calculations assume long-term repayment schedules. The costs and fees are spread too thin with APR calculations for loans that are repaid faster or have shorter repayment periods. For instance, the average annual impact of mortgage closing costs is much smaller when those costs are assumed to have been spread over 30 years instead of seven to 10 years.

Lenders have a fair amount of authority to determine how to calculate the APR, including or excluding different fees and charges.

APR also runs into some trouble with adjustable-rate mortgages (ARMs). Estimates always assume a constant rate of interest, and even though APR takes rate caps into consideration, the final number is still based on fixed rates. Because the interest rate on an ARM will change once the fixed-rate period is over, APR estimates can severely understate the actual borrowing costs if mortgage rates rise in the future.

Mortgage APRs may or may not include other charges, such as appraisals, titles, credit reports, applications, life insurance, attorneys and notaries, and document preparation. There are other fees that are deliberately excluded, including late fees and other one-time fees. All this may make it difficult to compare similar products because the fees included or excluded differ from institution to institution. In order to accurately compare multiple offers, a potential borrower must determine which of these fees are included and, to be thorough, calculate APR using the nominal interest rate and other cost information.

Why Is the Annual Percentage Rate (APR) Disclosed?

Consumer protection laws require companies to disclose the APRs associated with their product offerings, in order to prevent companies from misleading customers. For instance, if they were not required to disclose the APR, a company might advertise a low monthly interest rate while implying to customers that it was an annual rate. This could mislead a customer into comparing a seemingly low monthly rate against a seemingly high annual one. By requiring all companies to disclose their APRs, customers are presented with an “apples to apples” comparison.

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Algo Almanack is an editorial project powered by Choice Coin community. This was created to contain essential dates and industry information in Algo and Choice.