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.

VIDEO

Loading the player...

BREAKING DOWN '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 Compound Annual Growth Rate (CAGR) is the mean annual growth ...
  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. Fundamental Analysis

    How To Calculate Your Investment Return

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

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  3. Credit & Loans

    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.
  4. 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.
  5. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  7. Investing News

    Fund Firm Jolts: Pimco's Isn't The First Or Worst

    When you business is built on prudence and trust, a lot can go wrong to cost you tons of clients and assets. Here are a few examples.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  9. Investing Basics

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  10. Investing Basics

    Explaining Financial Assets

    A financial asset is intangible property that represents a claim on ownership of an entity or contractual rights to future payments.
RELATED FAQS
  1. How can I use the correlation coefficient to predict returns in the stock market?

    Simple interest is most commonly seen in short-term loans, such as those from payday lenders or pawn shops. You might see ... Read Full Answer >>
  2. What is continuously compounding interest?

    An interest contract with continuously compounding interest is designed to maximize the total possible interest accumulation ... Read Full Answer >>
  3. Is it better to get a balance transfer or a personal loan to pay off my credit card ...

    Since credit card debt often comes with high interest rates (from 12-25%), it can be very expensive to leave a large balance ... Read Full Answer >>
  4. Why is APR used to compare long-term loans?

    The widespread use of annual percentage rate, or APR, received a boon with the passing of the Truth in Lending Act, or TILA, ... Read Full Answer >>
  5. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  6. How does the bond market react to changes in the Federal Funds Rate?

    The bond market is highly sensitive to changes in the federal funds rate. When the Federal Reserve increases the federal ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  2. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  3. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  4. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  5. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  6. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!