APY (Annual Percentage Yield)
Definition
The effective annual rate of return on an investment or savings account, accounting for compound interest.
Formula
APY = (1 + r/n)^n - 1Annual Percentage Yield (APY) reflects the real rate of return earned on a savings deposit or investment when compound interest is factored in. Unlike APR, which represents cost to the borrower, APY represents the return to the saver or investor.
APY accounts for how often interest is compounded. A savings account with a 5% interest rate compounded daily will have a slightly higher APY than one compounded monthly, because you earn interest on your interest more frequently. The difference grows more significant with larger balances and longer timeframes.
When comparing savings accounts, CDs, or money market accounts, APY is the most accurate metric because it normalizes the compounding frequency. Federal regulations require banks to disclose APY to help consumers make informed decisions.
Related Calculators
Savings Interest Calculator
Calculate savings account growth with compound interest, APY comparison, and inflation-adjusted projections
Compound Interest Calculator
Calculate compound interest with contributions and visual growth chart
CD Calculator
Calculate Certificate of Deposit returns with compound interest and compare CD laddering strategies
Related Terms
APR (Annual Percentage Rate)
financeThe yearly cost of borrowing money expressed as a percentage, including fees and interest charges.
Compound Interest
financeInterest calculated on both the initial principal and the accumulated interest from previous periods, causing wealth to grow exponentially over time.
Interest Rate
financeThe percentage charged by a lender on borrowed money or paid to a saver on deposited funds, expressed as an annual percentage.
Certificate of Deposit (CD)
financeA time deposit offered by banks that pays a fixed interest rate for a specified term in exchange for keeping your money deposited.
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