Nominal Interest Rate Converter
Convert between APR (nominal rate) and APY (effective rate) with compounding
Financial Disclaimer: This calculator provides estimates for educational purposes only. Actual loan or investment terms may vary. Consult with a financial professional for specific advice.
Tip: APR is the nominal rate without compounding, while APY reflects the actual yield with compounding.
APR to APY Conversion
Effective Rate (APY): 0.00%
APY to APR Conversion
Nominal Rate (APR): 0.00%
Compounding Frequency Comparison
| Frequency | Periods/Year | APY (%) | Difference |
|---|
Understanding Interest Rates
Nominal Rate (APR)
The stated annual interest rate without accounting for compounding. This is the "face value" rate quoted by banks and lenders.
Example: A 5% APR loan compounds monthly has an effective rate higher than 5%.
Effective Rate (APY)
The actual annual rate accounting for compounding. This shows the true cost of borrowing or yield on an investment.
Example: 5% APR compounded monthly = 5.12% APY.
Compounding Frequency
How often interest is calculated and added to the principal. More frequent compounding means higher effective yields.
Key Point: Daily compounding yields more than annual compounding at the same nominal rate.
Continuous Compounding
The theoretical limit of compounding frequency, using the mathematical constant e (≈ 2.71828).
Formula: APY = eAPR - 1
Banking Tip: When comparing accounts, always look at APY rather than APR to understand the true yield.
Common Rate Scenarios
| Loan Type | Typical APR | Compounding | APY |
|---|---|---|---|
| 30-Year Mortgage | 4.5-5.5% | Monthly | 4.59-5.64% |
| Credit Card | 15-25% | Daily | 16.18-28.39% |
| Savings Account | 0.5-2.0% | Daily | 0.50-2.02% |
| Auto Loan | 3-10% | Monthly | 3.04-10.47% |
| CD (1-Year) | 1.5-3.5% | Quarterly | 1.51-3.55% |
*Rates shown are examples only. Actual rates vary by lender, creditworthiness, and market conditions.
Frequently Asked Questions
Why is APY higher than APR?
APY accounts for compounding - the process where earned interest starts earning additional interest. The more frequent the compounding, the greater the difference between APR and APY.
How often do banks compound interest?
Most savings accounts compound daily but pay monthly. CDs typically compound quarterly. Credit cards compound daily, which is why their effective rates are significantly higher than their stated APRs.
What's the difference between APR and interest rate?
For loans, APR includes both the interest rate and certain fees, giving a more complete cost picture. For deposit accounts, APR and interest rate typically mean the same thing - the nominal rate before compounding.
How does continuous compounding work?
Continuous compounding uses the mathematical constant e (Euler's number) to calculate interest as if it were being compounded every possible instant. It's the theoretical maximum compounding effect.
Which compounding frequency gives the highest yield?
For the same nominal rate, more frequent compounding yields higher returns. Daily compounding beats monthly, which beats quarterly, etc. Continuous compounding provides the absolute maximum possible yield.