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Annual percentage yield (APY)

Annual percentage yield, or APY, is the yearly rate of return on savings or deposits. It measures how much money grows over one year, stated as a percentage of the amount deposited.

APY includes the effect of compounding. Compounding means that interest earned is added to the balance, and later interest is calculated on that larger balance. APY therefore reflects interest earning interest over the year.

A simple interest rate does not account for compounding. It describes only the base rate applied to the original amount. When interest compounds, the APY is higher than the simple rate, and more frequent compounding widens that gap.

APY lets people compare accounts on a consistent basis, since it folds the compounding schedule into one number. The rate on a variable account can change over time, so a stated APY reflects current conditions rather than a locked return.

Related terms: APY vs APR · Compound interest · Interest rate

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