# tutorials

## The Difference Between Annual Percentage Rate (APR) and Annual Percentage Yield (APY) Explained

by on October 31, 2011

in Finance

This article was originally published as exclusive content for my facebook subscribers and is now being republished to reach a wider audience. Subscribe to my facebook feed and be the first to read more such exclusive content.

Quite a number of readers had written in asking me to explain the difference between APR and APY.

APR = Annual Percentage Rate. Think of this as simple interest.

APY = Annual Percentage Yield. Think of this as compound interest.

APR and APY explain why your Fixed Deposit certificate quotes an interest rate of 9% but upon maturity you get an interest amount that is slightly higher than what you’d actually get at 9%.

APY = APR compounded at a certain compounding interval.

The exact formula that relates these two is:

APY = (((1 + (Quoted_APR/100)/Compounding_Interval)^Compounding_Interval) – 1)*100

Look at this illustration (click on the image for a full-size version).

When APR = 10.25% and compounding is done quarterly then,

APY = (((1 + (10.25/100)/4)^4) – 1)*100 = 10.65%

On the other hand, if APR = 10.50% and compounding is done quarterly then,

APY = (((1 + (10.50/100)/4)^4) – 1)*100 = 10.92%

Finally, if APR = 10.25% and compounding is done semi-annually then,

APY = (((1 + (10.25/100)/2)^2) – 1)*100 = 10.51%

That explains the difference between APR and APY. Let me know if you have any questions.

Note: With Credit Cards you might sometimes see a monthly-APR quoted such as 3.1% per month. Simply multiply this by 12 to get the annual-APR. In this case, the annual-APR is 3.1% x 12 = 37.2%.

## Awareness Fridays: [Update] Guidelines on Detection and Impounding of Counterfeit Notes at Indian Banks

by on January 9, 2009

in Finance

On the subject of detection and impounding of counterfeit notes by banks operating in India, the Reserve Bank of India notes that,

Complaints are being received from the public that while impounding a counterfeit note, the tenderer is not informed the reasons for deeming a note as counterfeit. It is therefore advised that the format of the receipt provided in Annex I of the Master Circular [on Detection and Impounding of Counterfeit Currency] has been modified with immediate effect to indicate the parameters on which a note is deemed as counterfeit.

While I do not agree with all of the measures adopted by the Reserve Bank of India (the recent liquidity infusions, for example), I do agree that we have the best banking and financial regulator in the world. What do you think?

Awareness Fridays is my initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Awareness Fridays: A Guide to the Indian Banking Ombudsman Scheme

by on January 2, 2009

in Finance

The Reserve Bank of India also governs the Banking Ombudsman Scheme which provides an “expeditious and inexpensive forum to bank customers for resolution of their complaints relating to banking services.” The objective of the Banking Ombudsman Scheme is to be a visible and reliable system of dispute resolution mechanism for bank customers.

Though the Ombudsman was launched way back in 1995, how many among us are really aware of when and how to approach the Banking Ombudsman? Thankfully, as always, the Reserve Bank of India has recently released a guide on this very topic.

As the report points out,

Two major challenges in effective implementation of Banking Ombudsman Scheme are creating widespread awareness about the Scheme and providing easy access to grievance redressal under the Scheme.

By publishing this post, I have, hopefully, managed to address the first challenge to a small extent. I’d like you to continue this effort by forwarding this post (or the guide) to whoever you believe can benefit from reading it.

Awareness Fridays is my initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Awareness Fridays: Easy Reading — Mitigating Spillovers and Contagion Lessons from the Global Financial Crisis

by on December 12, 2008

in Finance

Today’s topic is an easy to understand and informative read for the weekend. It’s a speech delivered by Dr. D. Subbarao, Governor, Reserve Bank of India at the RBI-BIS Seminar on “Mitigating Spillovers and Contagion – Lessons from the Global Financial Crisis” (click to download) at Hyderabad earlier this month.

Of significance is this quote (a close friend and I had discussed precisely the same point in January of this year):

Forgotten in the euphoria of financial alchemy is the basic tenet that the financial sector has no standing of its own; it derives its strength and resilience from the real economy. It is the real sector that should drive the financial sector, not the other way round.

Financial alchemy. I love the term — a new one for my arsenal! A few examples for financial alchemy that we see on a daily basis include:

What do you think?

Awareness Fridays is an initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Why It’s a Good Idea to Save Regularly for Your Annual Expenses and How to Go About Doing That?

by on December 10, 2008

in Finance

Each month we’re so caught up in managing our day to day expenses that we tend to lose focus on our annual expenses. Generally speaking, any expense that you pay for once a year counts as an annual expense. Typical examples are insurance payments, property tax payments, maintenance contracts, and such. We tend to lose focus on such expenses because they are spread out through the year. For instance, you could be paying your vehicle insurance in January, your property tax in May, your health insurance in September and so on. Often, when it’s time to pay for such an expense, we find ourselves rummaging for the required cash. Worse, we simply give up and charge these expenses on our credit cards.

In the past, I’ve been through similar experiences. Back then, I always used to think “Wouldn’t it be wonderful if I could save regularly so that when an annual expense is due the money is already there in my account?” For a long time, however, I didn’t actually do anything about it.

About an year back, I set up a cash flow model for my annual expenses using Microsoft Excel (you can download a template here) and arrived at a sum that I should save each month. I set aside this sum every month from my salary. Whenever an expense was due, I simply issued a check from this saved amount. Result: no rummaging for cash; no credit card usage; zero stress.

Given my stress-free experiences this year, I encourage you to first identify and then save regularly for your annual expenses. Psychologically, you can simply treat this monthly sum as another EMI payment.

What do you think? Do you follow a different method?

PS: Let me know if you’re having any difficulty in understanding my template.

## Awareness Fridays: Guidelines on Detection and Impounding of Counterfeit Notes at Indian Banks

by on December 5, 2008

in Finance

Most of you must have faced a situation in which you visit a bank to deposit money and the teller starts observing each note under an ultraviolet lamp. What the teller is trying to do is to detect counterfeit currency notes. Most of us are unaware about our rights when it comes to such situations. For example: What is the procedure to be followed by both you and the bank when counterfeit currency is detected? What are your rights — as a depositor — in such an instance?

All such questions are thankfully answered in the Reserve Bank of India’s master circular on detection and impounding of counterfeit currency.

Have you ever been in such a situation before? If yes, it would be wonderful if you could share your experience here.

Awareness Fridays is an initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Awareness Fridays: Guidelines for Exchanging Mutilated Currency Notes at Indian Banks

by on November 28, 2008

in Finance

We’ve all had our fair share of receiving torn or soiled currency notes. Sometimes banks refuse to exchange these notes and we’re left fuming since we’ve no idea what the rules are with respect to exchange of such notes. Thankfully, the Reserve Bank of India has published guidelines for exchanging such currency.

Read these guidelines so that the next time you’re well prepared to advise the bank on their rules.

Awareness Fridays is my new initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Awareness Fridays: Guidelines for Credit Card Operations of Indian Banks

by on November 21, 2008

in Finance

Is there any Master Circular issued by the Reserve Bank of India on Credit Cards issued by Indian Banks?

There certainly is:

There’s some pretty useful information in these documents. Again, take some time off this weekend and assimilate its contents. You’ll be glad that you did.

Awareness Fridays is my new initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Awareness Fridays: Guidelines for Customer Service in Indian Banks

by on November 14, 2008

in Finance

The Reserve Bank of India time and again issues various instructions/guidelines in the area of customer service to bring about improvements in the quality of customer service in banks and their branches. But whether banks actually implement these guidelines is a different matter altogether. As bank customers, however, it’s prudent on our part to know and understand what these guidelines are in order that we can stand up for our rights. In order to have all current instructions on this subject at one place, the Reserve Bank of India has compiled many of the important instructions in the form of a Master Circular.

This circular is 92-pages long, but is packed with information that you, as the customer of a bank, should know.

Take some time off this weekend and assimilate its contents. You’ll be glad that you did.

Awareness Fridays is my new initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Awareness Fridays: A Case Study that Illustrates how the Deposit Insurance System Works in India

by on November 7, 2008

in Finance

Three weeks back, I wrote about the deposit insurance system in India. While that guide served as a ready reckoner, there’s nothing better to drive the point home than a real case study. One such case study — and a live one at that — involves Saraswat Bank’s takeover of South Indian Cooperative Bank (SICB). You can read-up on how the deposit insurance system is being invoked and utilized in this article published in the Economic Times.

Awareness Fridays is my new initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Awareness Fridays: A Reader Success Story…All It Takes is a Little Bit of Research

by on October 31, 2008

in Finance

A while back, reader Lakshmi wrote to me saying,

My mom is particularly concerned that my brother’s job is non-pensionable and recently she heard about the SBI Life Insurance Pension Fund. Please throw some light on this matter.

I couldn’t write back since I was held up with other work. But Lakshmi soon wrote back with this update:

About my previous questions on finance, I did some work myself. The SBI Life Insurance Plan is just a Unit-Linked Pension Plan and clearly states that the investor should bear the market risk. In short, they are saying that they’ll take our money only to lose it by investing in shares. I’ll go home and call up my aunt who suggested it in the first place.

Brilliant. I repeat my advise: Never ever invest in a financial instrument that you don’t understand. And to understand, all it takes is a little bit of research. That’s how you develop awareness.

Awareness Fridays is my new initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Awareness Fridays: How to Understand the Basics of Personal Finance

by on October 24, 2008

in Finance

A solid understanding of the basics of personal finance can only come through rigorous self-education. There is no shortcut. There are, however, excellent resources — both in print and on the internet (see below) — which can guide you with useful information on this journey. But the real learning happens when you analyze and apply this information to your personal situation. That’s the beauty of personal finance — each person’s situation and needs are different.

I developed my understanding by diligently and faithfully reading these resources:

There’s of course this blog too! That’s why you’re reading it right?

Awareness Fridays is my new initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Awareness Fridays: A Guide to the Deposit Insurance System in India

by on October 17, 2008

in Finance

You might have heard recent news about the government’s plan to double the deposit insurance cover for your bank deposits (savings, fixed, current, recurring, etc.). I welcome this move — though not for the reasons you hear in the media. I welcome this move simply because it’s good for you and me.

Did you know that deposit insurance is provided by the Deposit Insurance and Credit Guarantee Corporation of India (a wholly owned subsidiary of the Reserve Bank of India)? What exactly does deposit insurance cover? How does this insurance work? Is my bank covered by this insurance? Answers to these questions and more can be perused in the following guides:

Awareness Fridays is my new initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Awareness Fridays: The National Electronic Funds Transfer (NEFT) System

by on October 10, 2008

in Finance

Most of us would have, knowingly or unknowingly, used the National Electronic Funds Transfer (NEFT) system to facilitate online transfer of funds from any bank branch to any other bank branch within India. Since NEFT forms the backbone for a good percentage of our financial transactions, it’s good to have some in depth knowledge on how this system operates.

Awareness Fridays is my new initiative to spread awareness on topics relevant to personal finance — every Friday. I urge you to take some time off and absorb this information — it’s pretty useful. And, as always, do spread the word if you find this useful.

## Learn Corporate Finance Online

by on May 2, 2007

in Finance

One of the best resources I have ever found on the Internet is the Corporate Finance lecture webcast by Aswath Damodaran, a Professor of Finance and David Margolis Teaching Fellow at the Stern School of Business at New York University. I had Financial Management as part of my curriculum and it was one of my favorite subjects. Professor Damodaran’s teaching brings a completely new dimension to what I have learnt.

If you love Corporate Finance, this is one set of lectures you should not miss.