What is the 'Annual Percentage Yield  APY'
The annual percentage yield (APY) is the effective annual rate of return taking into account the effect of compounding interest. APY is calculated by:
The resultant percentage assumes that the funds will remain in the investment vehicle for a full 365 days.
BREAKING DOWN 'Annual Percentage Yield  APY'
The APY is similar in nature to the annual percentage rate (APR), which is used for loans rather than investments and states total borrowing costs, including fees, as a single percentage number. Both are standardized measures of interest rates, though unlike APR, the equation for APY does not consider account fees, only compounding periods. Its usefulness lies in its ability to standardize varying interestrate agreements into an annualized percentage number.APY vs. Rate of Return
In an investment scenario, rate of return is simply the amount by which an investment grows over a specified time period, expressed as a percentage of the original investment amount. Rates of return can be difficult to compare across different investment vehicles, especially when such vehicles feature different compounding periods. For example, one investment vehicle compounds interest monthly, another compounds quarterly, another biannually and lastly, one compounds interest only once per year.
Comparing these rates of return by simply restating each percentage value over one year gives an inaccurate result, as it ignores the effects of compounding interest. The shorter the compounding period, the faster the investment grows, since at the end of each compounding period, interest earned over the period is added to principal balance, and future interest is calculated on the larger principal.
APY standardizes each rate of return not only by restating it over one year but by adjusting the rate of return to assume a oneyear compounding period.
APY Calculation
For example, suppose you are considering whether to invest in a oneyear zerocoupon bond that pays 6% upon maturity or a highyield money market account that pays 0.5% per month with monthly compounding.
At first glance, the yields appear equal because 12 months multiplied by 0.5% equals 6%. However, when the effects of compounding are included by calculating the APY, the second investment actually yields 6.17%, as (1 + .005)^12  1 = 0.0617.
An investment offering an interest rate of 6% divided by 365, with interest compounded daily, carries an even higher APY. This is because the principal balance on which interest is calculated increases every day, rather than once per month or once per year.

Compound Interest
Compound Interest is interest calculated on the initial principal ... 
Effective Annual Interest Rate
Effective Annual Interest Rate is an investment's annual rate ... 
Periodic Interest Rate
The interest rate charged on a loan or realized on an investment ... 
Compound Return
The rate of return, usually expressed as a percentage, that represents ... 
Discrete Compounding
Discrete compounding refers to the method by which interest is ... 
Continuous Compounding
The process of earning interest on top of interest. The interest ...

Investing
The Interest Rates: APR, APY And EAR
When most people shop for financial products, all they focus on is the listed interest rate. Human eyes instinctively dismiss the fine print, which usually includes the terms APR (annual percentage ... 
Investing
Accelerating Returns With Continuous Compounding
Investopedia explains the natural log and exponential functions used to calculate this value. 
Investing
Overcoming Compounding's Dark Side
Understanding how money is made and lost over time can help you improve your returns. 
Personal Finance
5 Financial Math Skills Every Teen Should Learn
Calculus is good for abstract thinking, but what math skills should every student learn for managing his or her money? 
Financial Advisor
Compound Annual Growth Rate (CAGR)
The compound annual growth rate is an important tool for measuring investment performance and comparing it across asset classes. Discover how it is calculated and how it can inform your investment ... 
Investing
How to Calculate Your Investment Return
How much are your investments actually returning? Find out why the method of calculation matters. 
Managing Wealth
Dissecting the Simple Interest Formula
Simple interest ignores the effect of compounding: it's only calculated on the principal amount. This makes it easier to calculate than compound interest. 
Personal Finance
Simple Interest Loans: Do They Exist?
Yes, they do. Here is what they are â€“ and how to use them to your advantage.

What formula can I use to calculate interest on interest?
Find out more about compounding interest, what it measures and how to calculate the amount of compound interest accrued using ... Read Answer >> 
What is the difference between APR and APY?
Learn about the difference between the calculations for APR and APY. APY takes into account the number of times that the ... Read Answer >> 
How do I calculate compound interest using Excel?
Learn what compound interest is, the formula used to calculate it, and how to calculate it using three different techniques ... Read Answer >> 
How do I use the rule of 72 to calculate continuous compounding?
Find out why the rule of 72 does not accurately reflect the growth caused by continuous compounding, and which number can ... Read Answer >> 
How can I tell if a loan uses simple or compound interest?
Learn the differences between simple and compound interest and how you can use mathematical calculations and lender disclosures ... Read Answer >> 
What is the difference between continuous compounding and discrete compounding?
Learn to differentiate between and calculate the continuous and discrete compounding formulas for interestgenerating investments ... Read Answer >>