Annual Percentage Yield (APY) represents the total return on an investment or savings account over a one-year period, taking into account compound interest. It is expressed as a percentage and helps investors and savers understand the true earning potential of their funds.
Unlike the Annual Percentage Rate (APR), APY takes the compounding effect into consideration, meaning the interest earned is reinvested and starts earning additional interest.
APY reflects both the stated interest rate and the frequency of compounding. The more frequently interest is compounded, the higher the APY will be compared to the nominal interest rate. For example, if interest is compounded monthly, the APY will be higher than if it is compounded annually.
APY is particularly useful when comparing different investment or savings options. It allows investors to understand the potential returns they can expect from various financial products and make informed decisions about where to allocate their funds.
APY assumes that the investment or savings account remains untouched for the entire year and that the interest is reinvested. Any additional contributions, withdrawals, or changes in interest rates during the year can affect the actual returns.