Annual Percentage Yield (APY)
Definition
Annual Percentage Yield (APY) is the effective annual return on a deposit or investment, accounting for the effect of compounding over a one-year period.
APY vs. Interest Rate
| Interest Rate | The basic rate of return without compounding |
|---|---|
| APY | Includes the effect of compounding, showing the total return you’ll actually earn |
How Compounding Works
When interest compounds, you earn interest on:
- Your original principal
- Previously earned interest
The more frequently interest compounds, the higher the APY compared to the stated interest rate.
Compounding Frequency
- Daily: Interest calculated and added daily (highest APY)
- Monthly: Interest calculated and added monthly
- Quarterly: Interest calculated and added every three months
- Annually: Interest calculated and added once per year (lowest APY)
Example
A 5.00% interest rate with daily compounding might yield an APY around 5.13%, while the same rate with annual compounding yields exactly 5.00% APY.
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