APY (Annual Percentage Yield)
APY (Annual Percentage Yield) is the real rate of return you earn on a deposit account over one year, including the effect of compound interest. Unlike a simple interest rate, APY factors in how often interest compounds, giving you a true picture of what your money earns.
APY Definition
APY (Annual Percentage Yield) is the real rate of return you earn on a deposit account over one year, including the effect of compound interest. Unlike a simple interest rate, APY factors in how often interest compounds, giving you a true picture of what your money earns.
APY in Practice
A business keeps $50,000 in a checking account earning 1.75% APY. Over one year, that balance earns roughly $875 — without the business doing anything differently. Compare that to a traditional bank paying 0.01% APY, which would earn just $5 on the same balance.
Why It Matters
APY is the number you should compare when evaluating business bank accounts, savings accounts, or money market accounts. Banks sometimes advertise the simple interest rate, which understates what you actually earn. Always compare APY.
The difference between a high-yield and standard account compounds over time. On $100,000, the gap between 0.01% and 1.75% APY is over $1,700 per year — free money for choosing the right account.
FAQ
Q: Is APY the same as interest rate?
A: No. The interest rate is the base rate before compounding. APY includes the effect of compounding, so it's always slightly higher than the stated interest rate if interest compounds more than once per year.
Q: Is APY guaranteed?
A: For CDs, yes — your APY is locked for the term. For checking and savings accounts, APY is typically variable and the bank can change it.
Related Terms
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Related Terms
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