DEFINITION of 'Annual Percentage Yield  APY'
The effective annual rate of return taking into account the effect of compounding interest. APY is calculated by:
The resultant percentage number assumes that funds will remain in the investment vehicle for a full 365 days.
INVESTOPEDIA EXPLAINS 'Annual Percentage Yield  APY'
The APY is similar in nature to the annual percentage rate. Its usefulness lies in its ability to standardize varying interestrate agreements into an annualized percentage number.
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, we find that the second investment actually yields 6.17%, as 1.005^121 = 0.0617.
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