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What Is APY?

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  • Written By: Garry Crystal
  • Edited By: Niki Foster
  • Last Modified Date: 02 November 2014
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The Annual Percentage Yield (APY) is a financial tool used to ascertain how much a deposit earns. It is a standardized way of comparing investments. Consumers want their money to be working at its best for them, and this means putting it where it will receive the best APY.

The APY is the yield a deposit will earn over the term of a year. It refers to the income earned, and one of the most important aspects of choosing a bank in which to deposit earnings is to make sure it has a high APY. The yield is unique because it takes compounding into account. Compounding is the process of receiving earnings on earnings. The quoted APY tells a customer how much he is actually making on his money, while some other ways of quoting a rate do not necessarily take this into account.

The APY is generally higher for accounts with more frequent compounding periods. Consumers should ask their financial company how often they compound. If the money is compounded daily instead of monthly or quarterly, then customers will receive a better yield.

There are also various ways in which a person can inflate his personal APY. He can look at all of his assets as one, rather than as separate investments. It's also important for people to find ways to make sure that all their money is compounding as frequently as possible.

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The formula for calculating annual percentage yield is APY = (1+r/n)n - 1 where r is the nominal interest rate in its decimal form (e.g., a rate of 6.75% would be written as 0.0675) and n is the number of compounding periods per year (e.g., 4 if the rate compounds quarterly). This formula is also known as the effective annual rate (EAR) calculation.

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anon14629
Post 10

Can you run through it step by step cause this APR and APY is confusion to me........I still can't see how much interest I earn monthly?? help please sign confused but want to learn

dobattlers
Post 9

so what i get when i invest $5000.00 by a 3.50 APY daily or by the same APY but monthly or yearly what is better for me?

--- APY has already taken into account the compounding. I think you are confusing APY and APR. 5000 invested with a 3.50 APY would give you 175 of interest earned over a year when you invest 5000. The investment companies will tell u the APY because it is bigger than APR. APR is say 10% but this doesn't take in that the 10% is compounded. if 10% APR and compounded monthly it is really a APY of 10.47131 = ((1+.10/12)^12)-1 .10 is because 10% APR and 12 is how many times a year it is compounded (monthly so 12). APY is what banks say u get because they want to appear like they give you more interest on the money you have in your accounts with them. Whereas the credit card companies want to appear like you have to pay less on what you owe to them so they give you the APR (which is lower..remember the 10% from above), but you really are paying the APY(10.47131%). the credit card company doesn't want to tell u that u are going to pay 10.47131% so they say 10%. the APY that you have to pay credit card companies is usually called the EAR, not the APY. APY is what banks give you and EAR is what you pay the credit card companies, but they are calculated the same way.

bjk69
Post 8

so what i get when i invest $5000.00 by a 3.50 APY daily or by the same APY but monthly or yearly what is better for me?

chrsty209
Post 7

Is there a situation in which APY could be a bad thing?

anon8937
Post 6

APY means annual percentage yield. this is the effective interest rate, meaning how much you actually earn after your interest is compounded. compounding is just earning interest off of your interest, so if your money is compounded daily, each day your earnings + interest from yesterday are added together to create a new number, and this newer bigger number is the number you are earning interest on today. make sense?

so say you put away $100. with an interest rate of 10% you would end up with $110 after a year. (100 x .10 = 10, total 110) but if your interest is is compounded daily [ 1 + (.10/365] to the power of 365 leaves you with an APY of 10.52%, so your $100 turns into $110.52 after a year when the interest is compounded daily.

when they quote you a regular interest rate it doesn't take compounding into account so its never an accurate number. what number they advertise depends on what you're doing with your money. if you are borrowing money from the bank they quote you a regular interest rate because it looks lower so you think you have

to pay less - they trick you because they compound your loan and you end up paying more than you thought, but if you are investing your money in that bank they readily quote you the APY because it looks bigger.

anon6318
Post 4

how is APY different from interest rates?

anon5019
Post 3

How did you come up with the $172.02 amount? Please post your calculations.

anon4866
Post 2

Assuming monthly compounding, 5.25 APY is approximately 5.13 APR. On a 4-month CD, you would receive $172.02 in interest.

anon3656
Post 1

If a 4-month bank CD has an annual percentage yield (APY) of 5.25% and an amount of $10,000 is invested in the CD, what is the actual dollar amount that would be received at the end of the 4-month period? Is the 5.25% prorated for the 4-month period only or is the amount actually 5.25% even though it is referred to as "annual" percentage yield?

Thank you for your help.

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