Annual Percentage Yield (“APY”)
What It Means
Annual Percentage Yield, often referred to simply by its initials APY, is the annualized rate of return charged (or earned) on debt, accounting for the effects of compound interest.
APY is calculated as follows:
Annual Percentage Yield - Calculator
Why It’s Important
Interest rates are often advertised based on an Annual Percentage Rate, also known as APR. While APR is important, it only tells part of the story. The frequency of compounding can have a significant effect on the real rate of return. The shorter the compounding period, the larger the gap between the APR and the APY.