investing
Annual Percentage Yield (APY)
APY is the real rate of return on a savings account or investment after compounding is factored in for one year. A higher compounding frequency means APY > APR at the same nominal rate.
Formula
APY = (1 + r/n)ⁿ − 1 APY = (1 + r/n)ⁿ − 1, where r is the nominal annual rate and n is the number of compounding periods per year. A 5% nominal rate compounded monthly produces an APY of 5.116%.
Banks quote APY on savings accounts and APR (Annual Percentage Rate) on loans. Because APY includes compounding, it's the more useful figure for comparing savings products. For loans, APR is more important — and includes fees, which APY doesn't.
Related terms
- Compound Interest
- Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.
- Annual Percentage Rate (APR)
- APR is the annual cost of borrowing, expressed as a percentage. Unlike an interest rate, APR includes fees and other costs, making it the better figure for comparing loan offers.
Frequently asked questions
What is Annual Percentage Yield (APY)?
APY is the real rate of return on a savings account or investment after compounding is factored in for one year. A higher compounding frequency means APY > APR at the same nominal rate.
What is the Annual Percentage Yield (APY) formula?
The formula is: APY = (1 + r/n)ⁿ − 1