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The annual percentage yield (APY) is the real rate of return earned on a savings deposit or investment taking into account the effect of compounding interest. Compound interest is the interest earned on both the money you put into the account and the interest you receive over time.

People often confuse APY with APR. APR doesn’t take compounding interest into account, while APY is based on compounding. Financial institutions often use APY to promote their services and not APR since APY looks more attractive on the surface.

Here’s how APY is calculated:

APY = ((1 + Periodic Rate)^Number of periods) – 1

The more frequent the compounding periods, the higher the APY. 

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