Definition

• APY is the rate of return you will have received on your investment after one year.
  
  

Formula

• The formula to calculate APY is (1 + r/n)^n - 1. The "r" is the interest rate in decimal form (3.45 percent would be written as 0.0345), "n" is the number of compounding periods per year and "^" is to the power of. If the interest rate is compounded quarterly, then "n" would be 4. Using these numbers in this formula would equate to a 3.49 percent APY.
  
  

Types

• Banks and other financial institutions use APY to advertise interest-bearing accounts. You will see APY being quoted on savings accounts, interest-bearing checking accounts, money market accounts and certificates of deposit.
  
  

Compounding

• Compounding is when you earn interest on an investment in addition to previously accrued interest. The more often the interest is compounded, the higher your APY will be on your investment. APY can be compounded yearly, quarterly, monthly or daily.
  
  

Comparing Rates

• You can use the APY formula to compare how different interest rates with different compounding frequencies affect your total interest. For example, a lower interest rate that is compounded more frequently may give you a higher APY than a higher interest rate compounded less frequently.