APY
Back to GlossaryDefinition
The effective annual rate of return accounting for compounding.
Summary
APY (Annual Percentage Yield) is the real rate of return earned on an investment or paid on a deposit account over one year, taking into account the effect of compounding interest. Unlike simple interest rates, APY shows you exactly how much your money will grow in a year, making it easier to compare different investment options or savings accounts. It's expressed as a percentage and is always higher than the stated interest rate when compounding occurs more than once per year.
Usage Context
Understanding APY is crucial when comparing savings accounts, CDs, money market accounts, and other interest-bearing investments. It's essential for making informed financial decisions and maximizing returns on deposits.
Common Confusions
- Thinking APY and APR are the same thing
- Not understanding why APY is higher than the stated interest rate
- Confusing APY with simple interest calculations
- Assuming all banks calculate APY the same way
