What Is APY (Annual Percentage Yield)?
The effective yearly return on a deposit or investment, accounting for compounding.
Definition
APY is the rate of return on an interest-earning account (savings, CD, money market) including the effect of compounding within the year. A 5% rate compounded monthly produces an APY of about 5.12%. APY is always greater than or equal to the stated interest rate, with the gap widening as compounding gets more frequent. Federal Truth in Savings Act requires banks to disclose APY so savers can compare accounts.
Formula
APY = (1 + r/n)^n − 1, where r = nominal rate, n = compounding periods per year
Example
$10,000 in an account paying 5% APR compounded daily earns about $512 in year one, an APY of 5.12%.
Use It
Try the Compound Interest CalculatorRelated Terms
APR (Annual Percentage Rate)The yearly cost of a loan including interest plus most fees, expressed as a percentage.Compound InterestInterest calculated on both the original principal and the accumulated interest from prior periods.Interest RateThe percentage a lender charges to borrow money, or that a bank pays on a deposit, per year.