Understanding the Difference Between APR and APY: A Tale of Two Rates

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In the bustling streets of Mumbai, two friends, Ravi and Anjali, are discussing the intricacies of finance. Ravi, a passionate investor, is explaining the difference between two key financial terms, APR and APY, to Anjali, who is eager to learn more about saving and investing.

Ravi begins by explaining that APR, or Annual Percentage Rate, is the annual interest rate that you are charged on your loan or earned on your investment. This rate is fixed and does not take into account the effects of compounding interest over time.

Anjali looks intrigued, so Ravi continues. \“Now, the APY, or Annual Percentage Yield, is a more accurate representation of the total interest earned on your investment, considering the effects of compounding interest. It is the rate that accounts for the frequency of compounding and the effect it has on your investment over time,\“ he explains.

Anjali nods, realizing that the difference between APR and APY can significantly impact her savings. Ravi concludes the conversation by emphasizing the importance of understanding these terms when making financial decisions.