Annual Percentage Yield (APY)
The Annual Percentage Yield (APY) is a measure of the real rate of return on an investment or savings account, taking into account the effect of compounding interest over a year. Unlike the nominal interest rate, which does not consider compounding, APY gives a more accurate representation of how much interest an investment or savings account will earn over time. The higher the frequency of compounding, the greater the difference between the nominal interest rate and the APY.
Example
If a savings account offers a 5% interest rate compounded quarterly, the APY might be 5.12%, reflecting the effect of compounding throughout the year.
Key points
• Reflects the real rate of return on an investment, including compounding.
• Helps compare the actual earnings on savings accounts and other investments.
• The more frequently interest is compounded, the higher the APY.
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