What is the difference between Interest Rate and APY?

Question

What is the difference between Interest Rate and APY on savings accounts, CDs, etc? Is there a simple formula to convert the two?

Answer 1

The difference is that APY takes into account the effects of compounding interest while APR does not. The difference only matters when more than one interest payment is made per year, which is the case most of the time.

Here is an excellent article on the differences: APR and APY: Why your bank hopes you can't tell the difference

Here is the formula to convert a stated interest rate to APY:

APY = (1 + r ÷ n)n – 1
r = interest rate
n = the number of compounding periods