Annual Percentage Yield (APY) — Financial Glossary
Definition: The real rate of return on a savings account or investment, accounting for the effect of compounding interest.
What is APY?
Annual Percentage Yield (APY) is the effective annual rate of return on a deposit, taking into account the effect of compounding interest. Unlike a simple interest rate, APY shows you exactly how much your money will earn in one year.
APY vs. APR
| APY | APR | |
|---|---|---|
| Used for | Savings / deposits | Loans / borrowing |
| Includes compounding? | Yes | No |
| Higher is better? | Yes (for savers) | No (for borrowers) |
Formula
APY = (1 + r/n)^n - 1
Where r = stated annual rate and n = number of compounding periods per year.