APR and APY, you may have heard about these terms but have yet to learn what exactly they are. However, these terms are an essential part of the crypto industry. APY and APR are the two most common interest rates in the crypto industry. Both interest rate is applied to saving accounts and investments.
APR and APY are used to calculate the interest received on credit and investment. Both words sound the same, but their meanings are entirely different. Most financial institutions give APR and APY if you lend or stake your money.
Let’s understand these terms in detail here.
APR (Annual percentage rate)
The annual percentage rate is a type of interest a user receives on staking their coins and providing them for loans. In this way, a user makes accessible some amount of his funds for loans, and in exchange, he receives rewards annually, known as APR. APR is considered an exclusive compound rate in the financial market. In simple words, APR tells how much interest you could receive on your investment amount.
For E.g.
If you invested 500 sums at a 10% annual percentage rate, you would receive 510 at the end of the year.
Many platforms attract customers to stake their funds by offering them High API.
Here is the formula to calculate APR
A= [ P *( 1+ R x T ) ]
If P = 2.0 ether
R= 24 %or 0.24
T= 1 year
So final calculations will be
A= 2.0 Ether ( 2 +0.24 x 1 )
A = 2.24 Ether
APY (Annual percentage yield)
APY can be defined as the rate of interest you receive on your account for the investment you make, like a savings account or CD. API is given by adding compound interest with the interest you receive on your investment.
This shows how much earnings you can make with your investment as your money grows. APY is different from APR; it is a real return on your investment. APY calculates the compound rate and frequency; hence its also called an absolute interest rate.
While the APR only calculates the interest rate, APY calculates the interest rate Plus compound interest. Therefore APY will be higher in most investments.
To calculate APY, you have to apply the following formula:-
APY = ( 1 + r / n) n-1
r = period rate
n = Number of compounding periods
Conclusion
APR is a fundamental theoretical calculation of the benefit from loans or staked money. It gives investors and lenders a snapshot of their earnings without periodic compounding. Investors can know how much interest they earn by calculating simple interest only.
On the other hand, APY takes into account compounding, so calculations are made by adding interest rate and compound interest. The Crypto industry offers a vast array of investments based on these interest rates. Before investing or borrowing better understand these rates to avoid any financial loss.
