# What Is Annual Percentage Yield (Apy)? – Annual Percentage Yield (Apy) Financial Definition

Annual Percentage Yield (APY) is a term used to describe the effective rate of return on a savings account, certificate of deposit (CD), or other financial instrument that takes into account the effect of compounding interest. APY is an important concept to understand when comparing different financial investments as it is an effective way to calculate the total return on an investment and is a great tool to use when comparing various savings and investment products. This article will provide an overview of what APY is and how it can be beneficial when making financial decisions.

## How to Calculate APY

Calculating Annual Percentage Yield (APY) can be a tricky process, but it doesn’t have to be. All you need to know is the interest rate and the frequency of compounding, and you’re good to go! To start, you will need to know the interest rate, which is the amount you will be earning on the investment. From there, you will need to calculate the effective annual rate (EAR). This is done by taking the interest rate and multiplying it by the number of times the interest is compounded. For example, if the interest rate is 5% and the interest is compounded monthly, the EAR is 5% x 12 (months) = 60%. Now, you can calculate the APY by taking the EAR and dividing it by the number of times the interest is compounded. In this case, the APY would be 60% / 12 (months) = 5%. As you can see, calculating APY is relatively simple, and understanding how to calculate it can help you make better investment decisions.