What Are APY and APR?

What are APY and APR?

What Are APY and APR?

Earning a steady passive income is a dream for many; for some it is also a goal within reach. BTSE Earn provides a convenient way to earn interest on your idle assets.

But before jumping into some of the exciting BTSE Earn products, first let’s take a look at two terms you need to know.

People often confuse APY and APR, and perhaps that’s no surprise. Both are used to calculate interest on investment and credit products, yet fundamentally they are quite different.  

What Is APY?

A term commonly seen in the crypto and decentralized finance (DeFi) world, APY stands for Annualized Percentage Yield. It is the rate of return on investment, taking compound interest into account.

Interest payout is added to the balance periodically, so with a larger balance, more interest is received on the next payout date. APYs offered on each platform are often floating due to cryptocurrencies’ volatile nature.

The formula below can give you a sense of how much interest you will receive based on any given APY. 

Total Interest Earned:  

APY formula

p = Principal / Initial deposit

r = APY

n = number of compounding periods per year

t = number of years

Take for example BTSE Earn’s UST Flexible savings, which is compounded daily. If you deposited 1,000 UST for one year (365 days) at 15.57% APY, your account by year-end would show 1,169.95 UST.

You can apply this formula to any product offering an APY to obtain an estimated return on investment (ROI), thus helping you to better select the right investment.

What Is APR?

APR, or Annual Percentage Rate, is the simple interest rate charged to a borrower or paid to an investor over a year. APR is more commonly used by traditional financial institutions when talking about interest for a loan or credit card; it does not take compound interest into account.

The formula below offers a sense of how much interest you will receive based on any given APR.

Total Interest Earned:

APR formula

p = Principal / Initial deposit

r =APR

Take for example BTSE Earn’s USDT Fixed savings, which offers 8.5% APR. If you deposited 1,000 USDT for one year (365 days), you would have 1,085 USDT by year-end.

By applying this formula to any product offering an APR, you can more accurately estimate your ROI to find the investment that best suits your goals.

APY vs. APR

The difference between APY and APR is compound interest. APY accounts for compound interest; APR does not. It is crucial to consider this factor whether you are a borrower or an investor. The table below offers scenarios to show the effect of compound interest. 

Compounding Effect on Growth – $10,000 Invested at 5%

Compounding Effect on Growth – $10,000 Invested at 5%

Final Thoughts

APY and APR are two representations of interest rates. For interest rates for loans or credit cards, APR is often preferred by financial institutions as it provides a consistent basis for presenting annual interest rate information and serves to protect customers from misleading advertising.

On the other hand, APY is more often used when talking about investments, notably cryptocurrencies or equities. Institutions may use APY to entice customers to invest their assets for a longer period of time as it takes the frequency of compounding into account. Understanding APY and APR can have a tangible effect on how much an investor or trader pays or earns.

 


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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.

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