In crypto, APR (percentage annual rate) and APY (percentage annual yield) are popular terms used to calculate interest on investments and loan products. We will examine the differences between these terms that are often confused with each other.
The terms APR and APY are often seen in crypto exchanges, wallet staking reward calculations, or DeFi products. Also, APR (percentage annual rate) and APY (percentage annual yield) are considered important metrics for calculating how much is earned or how much interest should be paid when applied to account balances. Although these two terms appear to be the same, they have some differences.
APY (percent annual yield) takes compound interest into account, but APR, which stands for annual percentage rate, does not. In traditional banking or the crypto market, APR (annual percentage rate) refers to the interest charged on the principal of a loan or investment. Interest rates, which are also known from traditional banking, are known to most people. For example, if there is an investment of $100 and an annual interest of 5 percent is determined, a profit of 5 percent will be made within one year from the time of investment. To give the opposite example, if $100 is borrowed at a 5 percent interest rate, the $100 plus 5 percent interest received at the end of one year must be repaid. This simple calculation is based on the APR (annual percentage rate).
APR, as the name suggests, is a percentage taken annually. In short, if there is an investment or loan with a duration of less than one year, the interest is applied proportionally. For example, a six-month investment with an APR of 5 percent (annual percent rate) returns exactly half, or 2.5 percent, of the principal.
APY (percentage annual yield) is a measure of interest that takes into account the compound interest charged on investments or loans. Interest can be compounded at any given period. Continuous, daily, weekly, monthly or yearly. Compound interest is different from simple interest in that it is the daily interest rate multiplied by the number of days between payments. With compound interest included, it complicates the calculation of APY (annual percent yield) as it takes into account the number of periods in which the amount is adjusted for the interest rate.
What makes APY and APR different is the number of compounding periods. The more frequent the compounds of interest, the greater the difference between APR and APY. The major difference between APR and APY is the compound. When other factors such as initial investment, quoted interest rate, investment period are equal, APY (annual percent yield) will always yield a higher result. To give an example in practice, it is more useful to use APR rates when borrowing money and APY rates when investing. For this reason, investment companies usually advertise APY (annual percent yield), while lenders prefer to advertise APR (annual percent rate).
APR and APY Formulas
APR (annual percent rate) is a simple interest concept. The formula used to calculate the total amount based on the APR;
Total Amount = [Principal x (1+ Interest rate used x years)] A= [P x (1+ R x T)]
The APY (percent annual yield) takes into account the compound interest charged on the investment or loan. The formula used;
Total Amount= [Principal (1+ Interest Rate Used / Number of Compound Periods) Number of Compound Periods] A = [P (1 + R/N)N]
