Annual percentage yield (APY)

Definition

Annual percentage yield (APY) is a financial metric used to represent the total return on an investment or deposit over a one-year period, expressed as a percentage.

What is the annual percentage yield?

It provides a more accurate reflection of the true earnings on an investment than other interest rate measures because it takes compounding into account. 

APY allows investors to compare the potential returns of different investment options more accurately. It considers not only the nominal interest rate but also how frequently the interest is compounded, providing a more realistic representation of the overall return.

While APY reflects the interest earned, it’s important to consider the impact of inflation on the purchasing power of the returns. 

If you want to calculate your annual percentage yield, try our free calculator today.

Example of annual percentage yield

1. Investment details:

Emily decides to invest £10,000 in a 1-year CD with an annual interest rate of 4%

2. Compound frequency:

The CD compounds interest quarterly, meaning that the interest is calculated and added to the principal every three months.

3. End of the investment period

After one year, Emily’s CD matures. the total amount she receives is calculated based on the APY

Total amount = £10,000 x (1 = APY) = £10,406

Emily receives approximately £10,406 at the end of the investment period, including both the initial principal en the interest earned.