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What is the difference between APY and APR?

Updated this week

At Bake, you’ll come across two key terms when it comes to rewards:
APY (Annual Percentage Yield) and APR (Annual Percentage Rate). Both measure returns, but they calculate them differently.

APY – Annual Percentage Yield

APY reflects the total annual return with compound interest — meaning your earnings generate their own earnings over time.

To reach the displayed APY, your interest must be reinvested. For example, if you’re using our Staking service and enable Auto-compound, your earned rewards will be added back into the pool, helping you achieve the full APY rate.

APR – Annual Percentage Rate

APR shows the annual return without compounding. It represents the return you'd earn on your initial investment only.

If you choose to manually reinvest your rewards, your overall return will grow beyond the APR — and start to resemble APY over time.

How to Calculate APR

You can calculate the final amount using this formula:

A = P × (1 + R × T)
Where:

  • A = total amount

  • P = principal (initial investment)

  • R = annual interest rate

  • T = time in years

Example:
If you invest 0.5 BTC at 7% interest for 1 year:
A = 0.5 × (1 + 0.07 × 1) = 0.535 BTC

If you hold for 3 months (0.25 years):
A = 0.5 × (1 + 0.07 × 0.25) = 0.50875 BTC
So you'd earn 0.00875 BTC in interest.

How to Calculate APY

APY accounts for compounding, where interest is added to your balance at regular intervals. The formula is:

APY = (1 + r / n)ⁿ - 1
Where:

  • r = annual interest rate

  • n = number of compounding periods per year

Example:
If you invest 1,000 DFI at a 20% annual rate with daily compounding, after one year your balance would grow to 1,221 DFI. In the second year, it would grow to 1,492 DFI — thanks to compounding.

In general, the more frequently you compound and the longer you hold, the greater your total returns.

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