When N is equaled to 12 , we get APR and APY when N is set 1 , can somebody explain , how the monthly compounding effect is not being considered by setting N to 12(for APR) and how is considered when N is set to 1(for APY)? What is I/Y on the calculator?
APR is a simple interest calculation (monthly rate * 12) whereas APY is a compounded rate ( (1 + monthly rate) ^ 12 )
I/Y refers to interest rates for each period.
For example, APR = 12%; APY = 12.68%
To get APY:
1. 12% / 12 months = 1% per month
Compound the monthly 1% rate by 12 months = 1.01 ^ 12 = 12.68%
2. N = 12 (the amount of period)
I/Y = 1 (rates for each period – 1% )
PV = -1 (Let’s use 1 for simplicity; use negative if you want your FV to look good-> positive)
CPT -> FV = 1.1268
1.1268 – 1 = 0.1268 = 12.68%
Another method to convert from APR to/from APY is to use the ICONV function (2ND + 2)
APR -> APY (use arrow up or down to move to the next settings and use ENTER to save it)
1. NOM = 12 (this is the nominal rate)
2. C/Y = 12 (this is the total period)
3. CPT EFF and you should get 12.68
APY -> APR
1. EFF = 12.68
2. C/Y = 12
3. CPT NOM = 12
Hope that helps.
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