Understanding APR and APY

This video tutorial explains how to calculate the Annual Percentage Rate (APR) and the Annual Percentage Yield (APY). It begins with a credit card example, showing how to determine the APR by multiplying the periodic rate by the number of periods per year. The video then explains how to calculate the APY using a formula that accounts for compounding interest. It compares the differences between APR and APY, highlighting that APY is typically higher due to compounding. The tutorial concludes with a payday loan example, illustrating how high APRs compensate for the risk of non-repayment.

What is the APR if a credit card company charges 0.5% per month?

• 5%

• 6%

• 8%

• 7%

How is the APY different from the APR?

• APY includes simple interest only

• APY is calculated monthly

• APY accounts for compounded interest

• APY is always lower than APR

What is the APY if the APR is 6% and interest is compounded monthly?

• 6.168%

• 6.5%

• 6.8%

• 7%

If a credit card has an APR of 20% compounded monthly, what is the approximate APY?

• 23%

• 21.94%

• 20.5%

• 22.5%

How does daily compounding affect the APY compared to monthly compounding?

• It slightly increases the APY

• It decreases the APY

• It has no effect on the APY

• It significantly decreases the APY

What is the APY if the APR is 20% and interest is compounded daily?

• 23%

• 22.5%

• 22.13%

• 21.94%

Why is the APY typically higher than the APR?

• Because it is calculated annually

• Due to lower interest rates

• Due to the effect of compounding

• Because it includes fees

How many 14-day periods are there in a year?

• 27

• 26

• 25

• 24

What is the periodic rate for a payday loan with a 10% interest and a $20 fee on a $1,000 loan?

• 0.12

• 0.10

• 0.15

• 0.20

Why do payday loans have a high APR?

• Due to government regulations

• Because they are long-term loans

• To cover the risk of non-repayment

• Due to low risk