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Annual Percentage Yield (APY)
Definition
APY is the real rate of return on an investment or savings account, accounting for the effect of compound interest over one year.
Explanation
APY reflects the actual earnings you'll receive from a savings account or investment over a year, considering how often interest compounds. The more frequent the compounding, the higher the APY relative to the nominal interest rate. A savings account with 5% interest compounded monthly has an APY of about 5.12%.
When comparing savings accounts, CDs, or investment products, always compare APY rather than the stated interest rate for an accurate comparison of potential earnings.
Example
A 5% interest rate compounded monthly = 5.12% APY. On a $10,000 deposit, that's $512 earned vs $500 with simple interest.