APR vs APY 03 - APR vs APY How the Distinction Affects You...

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APR vs. APY: How the Distinction Affects You http://www.investopedia.com/articles/basics/04/102904.asp 1 of 2 2/27/2007 11:56 PM Email this Article Print this Article Comments Add to del.icio.us Other RSS Readers Home Dictionary Articles Tutorials Exam Prep Ask Us Stock Simulator Stock Quotes Stock Ideas Free Tools Go Go 1. Stock Picking 2. FOREX 3. Options Trading Chalk Talk Investing Basics Stocks Options/Futures FOREX Bonds Trading Mutual Funds Personal Finance Retirement Young Investors Professional Education Financial Careers FAQs APR vs. APY: How the Distinction Affects You October 29, 2004 | By Investopedia Staff , ( Investopedia.com ) It is often purported that Albert Einstein referred to compound interest as the greatest force on earth. Strong words from one of the smartest men to ever live. Although this article's intention is not to ponder Einstein's most compelling views, we do intend to demonstrate the importance of understanding the difference between Annual Percentage Rate ( APR ) and Annual Percentage Yield ( APY ) and how one takes compounding into account while the other does not can affect the amount you pay on a loan or the amount you receive as a lender. What is Compounding? At its most basic, compounding refers to earning interest on previous interest. All investors want to maximize compounding on their investments, while at the same time minimize it on their loans . (For more detail on this subject, see Investing 101: The Phenomenal Concept Of Compounding .) Compounding is especially important in our APR vs. APY discussion because many financial institutions have a sneaky way of quoting interest rates that use compounding principles to their advantage. Being financially literate in this area will help you spot which interest rate you are really getting.
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