September 01, 2003
APY
Here's another nice little tip I learned. I was knee-deep in formulas about IRR and APY and no one ever explained this simple thing to me:APY is just the interest rate for an investment if it were only compounded yearly.
It's basically an equalizer. So whether you have a credit card compounded continuously, a money market, compounded daily, or a bank account compounded quarterly, they are all required to report their effective interest rates in terms of APY instead. What it would be if it were compounded annually.
The credit card companies are good at abusing this. They can say that they charge some percentage interest rate. But converted into APY it would be much higher. The reason is that if the money is working for you, then a continual interest rate can be much lower than its APY to generate the same amount of interest. But they can try and tell you that they're "only" charging you x% continually compounded, when the APY would be much higher.
Update: Argh, even this isn't technically right. For partial periods they do simple interest, which means that an APY can actually be just a tiny bit higher than yearly-compound for a period that includes a partial year. Oh well.