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You may notice if you’re shopping for a savings account that banks advertise both an interest rate and an annual percentage rate, or APY. While an account’s interest rate can give you a basic ...
It would take you 60 months (or five years) of $266.67 monthly payments to pay off the balance, and you’d end up paying $5,823.55 in interest over that time — about 37% of your total payments.
However, if the APY were compounded monthly, the effective rate would be 5.12%, and you would earn $51.16 in interest. Is APY paid monthly? APY is paid in set periods.
This is a reasonable approximation if the compounding is daily. Also, a nominal interest rate and its corresponding APY are very nearly equal when they are small. For example (fixing some large N), a nominal interest rate of 100% would have an APY of approximately 171%, whereas 5% corresponds to 5.12%, and 1% corresponds to 1.005%.
The higher the APY, the more interest you’ll earn on your CD. You may also want to note how often the APY compounds — daily, monthly or quarterly. Check the CD’s fine print or call to ask.
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