Annual Percentage Yield (APY)

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Definition of 'Annual Percentage Yield (APY)'

Annual Percentage Yield (APY) is a measure of the interest rate earned on a deposit or investment, taking into account the effect of compounding interest. It is expressed as a percentage of the original principal invested.

APY is calculated by multiplying the nominal interest rate by the number of compounding periods per year. For example, if a deposit earns 5% interest compounded annually, the APY is 5%. If the interest is compounded quarterly, the APY is 5.06%.

APY is a more accurate representation of the true interest rate on an investment than the nominal interest rate, because it takes into account the effect of compounding. For example, a deposit that earns 5% interest compounded annually will grow to 1.05 * 1.05 = 1.276 times its original value after one year. A deposit that earns 5% interest compounded quarterly will grow to 1.025 * 1.025 * 1.025 = 1.283 times its original value after one year.

The APY is important for comparing different investments and for making financial decisions. For example, if you are considering two investments that offer the same nominal interest rate, but one investment compounds interest quarterly and the other compounds interest annually, the investment that compounds interest quarterly will offer a higher APY.

It is important to note that APY is not the same as effective annual rate (EAR). EAR is a measure of the interest rate earned on an investment, taking into account the effect of compounding interest and fees. APY does not take into account fees, so it is a more accurate representation of the true interest rate on an investment than EAR.

* APY is always greater than or equal to the nominal interest rate.
* APY is higher for investments that compound interest more frequently.
* APY is not affected by the amount of money invested.
* APY is not affected by the length of time the money is invested.

Annual Percentage Yield (APY) is a valuable tool for comparing different investments and for making financial decisions. By understanding how APY is calculated, you can make informed decisions about where to invest your money.

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