How Is APY Figured?
APY Defined Annual percentage yield, or APY, is the effective rate of return over a one-year period factoring in the effect of compounded interest. Because different types of accounts assess interest in different ways, APY was created to help consumers compare products. It should not be confused with APR, annual percentage rate, which is similar but limited to the rate of interest before accounting for the effect of compounding Compounding Interest The power of compounding interest should not be overlooked by investors. It is essentially the ability to earn interest on earned interest. That is, when interest accrues to an account, a Certificate of Deposit or some other financial instrument, it can be withdrawn immediately, or it can be reinvested. If reinvested, it serves to raise the principal on which interest is paid over future periods. As a result, the total yield increases well beyond the initial rate of interest. Calculating APY Calculating APY can involve complex math, but one
