What Is The Difference Between APY And APR?
APY and APR are two acronyms that are often used interchangeably. But in reality, there are many differences between these two terms. This article lets you know the key differences between APR and APY, and how to determine which one of them is the better choice.
APR stands for annual percentage rate, while APY, or annual percentage yield, includes interest compounded quarterly, monthly, weekly, or daily. This small distinction can have a big impact on how return estimates are calculated over time. Therefore, it’s essential to know how these two factors are determined and what it means for the returns you may expect from your digital investments.
What is APY?
The term “annual percentage yield,” or “APY,” refers to the entire amount of interest you will earn over the duration of a year, including compound interest.
Taking into account all the interest that has accrued on your principal balance, this rate represents the actual value of your assets at the end of a certain period.
For instance,
If you put $100 into a project that yields 25% APY, after a year, compounding all of the past returns from this investment ($1.04), you will have $125 in your account.
Your return on that investment is represented by the additional $1.04.
What is APR?
The term “APR” stands for “Annual Percentage Rate,” and it describes how much interest you will generate over the duration of a year. Your investment balance in DeFi and blockchain startups is used to calculate this rate.
For instance,
If you put $100 into a project that pays an APR of 25%, you will have $125 in your account after a year. You got back your investment in the form of the extra $25.
Why Are Defi APR And APY Important?
If you keep your money on a DeFi platform for more than a year, the differences can be substantial.
Consider making a $1,000 investment in a project that will return 10% APR.
Your initial $1,000 investment will be worth around $1,100 after a year (10% of $1,000). But if you wait another year, the amount will increase.
On the first $1,000 as well as the additional $100 that you earned, you will receive 10% each. Thus, after two years, your investment will be worth approximately $1,210. (ten per cent of one hundred)
If the platform paid 10% APY rather than APR, the amount you would have at the end of two years ($1,210) would be roughly the same.
However, if it paid 10% APR as opposed to APY, it would take slightly more than three and a half years to accumulate that same sum.
Conclusion
Investors in cryptocurrencies will feel more confident staying with the market over the long run if they understand what APR and APY mean. Opportunities with high yield always have underlying narratives that we may not completely comprehend. Being attentive investors may therefore assist us in avoiding rigged cryptocurrency schemes. To reiterate, risk management is important if we want to avoid making costly errors.
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