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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.

Quick Answers to Curious Questions

APY measures the real rate of return on an investment or savings account, including the effects of compounding interest over a year.

APY provides a true representation of how much interest you’ll earn over a year, making it easier to compare different accounts.

APY includes the effect of compounding, while the nominal interest rate does not, making APY a more accurate measure of actual returns.
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