Definition
APR (annual percentage rate) is a simple yearly rate that ignores compounding, while APY (annual percentage yield) includes interest earned on interest, so APY is higher whenever interest compounds more than once a year.
How it works
APR states the yearly rate before compounding. At 10% APR, one year of interest on $1,000 is $100 if nothing is reinvested. APY shows what the rate becomes once interest is added to the balance and starts earning interest itself. The formula is APY = (1 + APR ÷ n)^n − 1, where n is the number of compounding periods in a year, such as 12 for monthly or 365 for daily.
The more often interest compounds, the larger the gap between the two numbers, although the gap grows more slowly as compounding becomes more frequent. With a single compounding period a year, APR and APY are equal. Providers may quote whichever figure suits them: a borrowing cost is often shown as APR, while a savings or staking product is often shown as APY because it looks higher.
In crypto, rates for staking, lending and liquidity pools are usually variable and can change daily, so neither figure is a promise of future returns. APY also assumes that every reward is reinvested at the same rate for the whole year. To compare products fairly, convert both to the same measure and check the compounding frequency and any fees.
Example (hypothetical numbers)
Suppose $5,000 earns 10% APR for 1 year. With no compounding, interest = $5,000 × 0.10 = $500.
Monthly compounding: APY = (1 + 0.10 ÷ 12)^12 − 1 ≈ 10.47%, or about $523.57 of interest.
Daily compounding: APY = (1 + 0.10 ÷ 365)^365 − 1 ≈ 10.52%, or about $525.78 of interest.
The same 10% APR can be presented as an APY of about 10.47% or 10.52%, so two different numbers may describe the same rate.
Common mistakes
- Treating APR and APY as the same number.
- Comparing one product's APY with another product's APR.
- Assuming a quoted crypto APY will hold for a whole year.
- Forgetting that APY assumes every reward is reinvested at the same rate.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.