Annual Percentage Yield - APY

AAA

DEFINITION of 'Annual Percentage Yield - APY'

The effective annual rate of return taking into account the effect of compounding interest. APY is calculated by:

Annual Percentage Yield (APY)



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 interest-rate agreements into an annualized percentage number.

For example, suppose you are considering whether to invest in a one-year zero-coupon bond that pays 6% upon maturity or a high-yield 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 1.005^12-1 = 0.0617.

RELATED TERMS
  1. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
  2. Money Market Account

    An interest-bearing account that typically pays a higher interest ...
  3. Consumer Credit Protection Act ...

    Federal legislation that created disclosure requirements that ...
  4. Annualize

    1. To convert a rate of any length into a rate that reflects ...
  5. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. ...
  6. Compounding

    The ability of an asset to generate earnings, which are then ...
Related Articles
  1. Credit & Loans

    Is it better to get a balance transfer or a personal loan to pay off my credit card debt?

    Find out what you should consider before deciding to pay off your credit card debt by taking out a personal loan or using a balance transfer to another card.
  2. Credit & Loans

    Why is APR used to compare long-term loans?

    See what benefits an annual percentage rate, or APR, offers to consumers that other interest rate calculations might not, especially with long-term debt.
  3. Fundamental Analysis

    How To Calculate Your Investment Return

    How much are your investments actually returning? Find out why the method of calculation matters.
  4. Investing Basics

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  5. Investing Basics

    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.
  6. Promising high yields that the Eurozone and U.S. can't match, West African sovereign debt has caught the attention of savvy investors.
    Bonds & Fixed Income

    Interested In West African Debt? Look Here First

    Promising high yields that the Eurozone and U.S. can't match, West African sovereign debt has caught the attention of savvy investors.
  7. Pimco has stabilized its Total Return fund, but its returns are still shaky and its sales load is still a fat one.
    Professionals

    A Look At Pimco's Total Return Fund Post-Gross

    Pimco has stabilized its Total Return fund, but its returns are still shaky and its sales load is still a fat one.
  8. Bonds & Fixed Income

    What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields move in opposite directions.
  9. Bonds & Fixed Income

    How long will it take for a bond to reach its face value?

    Learn when different savings bonds reach face value, and determine the best time to cash them in to get the highest return on your money.
  10. Bonds & Fixed Income

    How long can I hold my HH/H Bonds and still earn interest?

    Take advantage of your bond investment and learn how long you can hold on to your Series H/HH Bonds and still earn interest and receive interest payments.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center