Annual Percentage Yield (APY)

Banks often state a rate together with how often it compounds, such as "6% compounded monthly". Because interest is added each month and then earns interest itself, the amount actually earned over a year is a little more than 6%. APY shows that true one-year figure.

With 6% compounded monthly, the account adds 0.5% each month. After twelve months, a deposit of 1,000 grows to about 1,061.68, not 1,060. The APY is therefore about 6.17%.

APY makes it easy to compare savings accounts with different compounding schedules. An account paying 5.95% compounded daily and one paying 6.00% compounded yearly can be ranked correctly only once both are converted into APY. The account with the higher APY earns more.

APY assumes the rate stays the same all year and that interest is left in the account. In some countries, the same idea goes by a different name, such as the annual equivalent rate (AER) in the United Kingdom. It is the savings-side counterpart of the effective annual rate used for loans.