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.

Effective Annual Interest Rate
Effective Annual Interest Rate is an investment's annual rate ... 
Compound Return
The rate of return, usually expressed as a percentage, that represents ... 
Continuous Compounding
The process of earning interest on top of interest. The interest ... 
Compounding
The ability of an asset to generate earnings, which are then ... 
Biotech Compound
A chemical entity that forms the starting point in the drug development ... 
Compound
The ability of an asset to generate earnings, which are then ...

Personal Finance
APR and APY: Why Your Bank Hopes You Can't Tell The Difference
Banks use these rates to entice borrowers and investors. Find out what you're really getting. 
Investing
Accelerating Returns With Continuous Compounding
Investopedia explains the natural log and exponential functions used to calculate this value. 
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
Learn Simple and Compound Interest
Interest is defined as the cost of borrowing money, and depending on how it is calculated, it can be classified as simple interest or compound interest. 
Investing
The Effective Annual Interest Rate
The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding. 
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 ... 
Retirement
Using Compounding to Boost Retirement Savings
Allowing growth on your investments to compound over time gives you immense returns when saving for retirement. 
Investing
APR vs. APY
Annual percentage rate and annual percentage yield are two ways companies calculate the amount of interest you can owe. Learn more about them and find out which is the better rate.

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 >> 
How do mutual funds compound interest?
Learn how mutual funds can grow wealth over time through the magic of compound interest by reinvesting dividends back into ... Read Answer >> 
What is the difference between stated annual return and effective annual return?
Essentially, the effective annual return accounts for intrayear compounding, and the stated annual return does not. The ... 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 >>