APY stands for “annual percentage yield.” It is the real rate of return earned on your savings or investment, accounting for any impact of compounding interest. It represents the actual rate of return that will be earned in a year if interest is compounded.
My high yield savings account pays 2.0% interest, compounded monthly, resulting in an APY of 2.018%.
The APY is higher than the quoted, nominal interest rate due to the impact of compounding. The nominal rate is divided by the number of periods in a year (N). In the example above, compounding monthly means the nominal rate would be divided by 12.
Calculating the APY is helpful in standardizing investment returns for comparison, that may have different compounding periods and different interest schedules.« Back to Glossary Index