Difference between APR and APY

Links to this post
APR is the annual rate of interest without taking into account the compounding of interest within that year. Alternatively, APY does take into account the effects of intra-year compounding. Here is a look at the formulas for each method:



For example, a credit card company might charge 1% interest each month; therefore the APR would equal 12% (1% x 12 months = 12%). This differs from APY, which takes into account compound interest. The APY for a 1% rate of interest compounded monthly would be [(1 + 0.01)^12 – 1= 12.68%] 12.68% a year. If you only carry a balance on your credit card for one month's period you will be charged the equivalent yearly rate of 12%. However if you carry that balance for the year, your effective interest rate becomes 12.68% as a result of the compounding each month.

The Borrower's Perspective
As a borrower, you are always searching for the lowest possible rate. When looking at the difference between APR and APY, you need to be worried about how a loan might be "disguised" as a lower rate than it really is.

Banks will often quote you the Annual Percentage Rate (APR). This figure does not take into account any intra-year compounding either semi-annual (every six months), quarterly (every three months), or monthly (12 times per year) compounding of the loan. The APR is simply the periodic rate of interest multiplied by the number of periods in the year.


As you can see, even though a bank may have quoted you a rate of 5%, 7%, or 9% depending on the frequency of compounding (this may differ depending on the bank, state, country, etc), you could actually pay a much higher rate. In the case of a bank quoting an APR of 9%, this does not consider the effects of compounding. However, if you were to consider the effects of monthly compounding, as APY does, you will pay 0.38% more on your loan each year - a significant amount when you are amortizing your loan over a 25- or 30-year period.

The Lender's Perspective

Now as you may have already guessed, it is not hard to see how standing on the other side of the lending tree can affect your results in an equally significant fashion, and how banks and other institutions will often entice individuals by quoting APY. Just as individuals who are seeking loans want to pay the lowest possible rate of interest, the same individual wants to receive the highest rate of interest when they themselves are the lender.

Investing Fundas

Links to this post
The first thing when "investing" comes to mind is saving money for future. This is not true now-a-days when investing truly means maximizing your net returns. One of the important factors while maximizing returns is to reduce the fees and taxes, which many investors ignore.
Yesterday I was chatting with my brother and he wanted to invest in some ESPP, which is nothing but a option to invest in shares of the company you work for. I strongly advised him not to do so. One of the reasons (out of several ones) I feel is that an investor should not invest in the industry they themselves are working. So if I am working in IT, then my portfolio should not consists of many IT shares. Some people might say that then it is advantageous to invest in shares of your own industry since you know it pretty well. This knowledge will help you pick the rock solid shares with ease. My argument is a bit pessimistic. If you work in the same industry where your investments are, chances are that with a sudden downturn or slowdown, not only affects your job but also your investments. Imagine IT people having IT shares during the 2000 dotcom bust. They would have lost not only their jobs, but their savings too !!

LIC backed by government

Links to this post

A recent news in the Economic Times, mention that governemnt has decided to continue backing up the LIC policies. A gurarantee by government implies a liability which must be mentioned somewhere in the finances of the government. I think, gone are the days when people used to subscribe policies based on whether these are backed by government or not. The IRDA already have stringent policies for all insurance players, private or public. Anyway here is the entire article:


THE 16 crore policyholders of the Life Insurance Corporation (LIC), can heave a sigh of relief with the government planning to continue with its guarantee for these policies. Fearing value erosion if the sovereign cover is withdrawn, the government has decided against discontinuing it.
“Too much is at stake, we are not withdrawing the guarantee,” sources said. At present, the government guarantees the payment of the sum assured and the bonuses on all LIC policies. Withdrawing the guarantee was debated by the finance ministry for some time. This was after the insurance regulator recommended a withdrawal of its sovereign guarantee on the LIC policies to ensure a level-playing field vis-a-vis private players. The latter does not enjoy such covers.
Extending sovereign guarantee to LIC does not have a direct bearing on the fiscal deficit, it adds to the fiscal pressure of the government since it is classified under contingent liability.
The government is currently reviewing the 1956, LIC Act. It plans to amendment the Act by the end of this year. Though a government guarantee has existed since 1956, there had been no cause for invoking the guarantee. The state insurer has a share capital of only Rs 5 crore, but has managed to remain in business on the strength of the sovereign guarantees backing its commitments.
While trying to restructure LIC a couple of years ago, Deloitte & Touche Tohmatsu India, the consultant hired by the insurer, had said the government guarantee is quasi equity, which should be replaced with actual equity. But experts see no argument in this condition.
Experts feel that while it may not be legally possible to withdraw the guarantee on policies that have been already issued, the government can withdraw its cover on future policies.
Also linked to the amendment of the LIC Act is a plan to enable the company to set up separate reserves for solvency margin at par with private insurers.
Under the LIC Act, 95% of the surplus earned goes to the policy holders and 5% to the government as dividends.
The surplus does not go to the corporation. Amendments to the LIC Act will also enable LIC to raise its paid-up capital from Rs 5 crore to Rs 100 crore, as in the case of private insurers.