The Annual Percentage Yield (APY) is a financial tool used to ascertain how much a deposit earns. It is a standardized way of comparing investments. Consumers want their money to be working at its best for them, and this means putting it where it will receive the best APY.
The APY is the yield a deposit will earn over the term of a year. It refers to the income earned, and one of the most important aspects of choosing a bank in which to deposit earnings is to make sure it has a high APY. The yield is unique because it takes compounding into account. Compounding is the process of receiving earnings on earnings. The quoted APY tells a customer how much he is actually making on his money, while some other ways of quoting a rate do not necessarily take this into account.
The APY is generally higher for accounts with more frequent compounding periods. Consumers should ask their financial company how often they compound. If the money is compounded daily instead of monthly or quarterly, then customers will receive a better yield.
There are also various ways in which a person can inflate his personal APY. He can look at all of his assets as one, rather than as separate investments. It's also important for people to find ways to make sure that all their money is compounding as frequently as possible.
The formula for calculating annual percentage yield is APY = (1+r/n)n - 1 where r is the nominal interest rate in its decimal form (e.g., a rate of 6.75% would be written as 0.0675) and n is the number of compounding periods per year (e.g., 4 if the rate compounds quarterly). This formula is also known as the effective annual rate (EAR) calculation.