Annual Percentage Yield

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Definition: Annual Percentage Yield

Annual Percentage Yield
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What is the dictionary definition of Annual Percentage Yield?

Dictionary Definition

The rate of return on an investment for a one-year period. For an interest-bearing deposit account, such as a savings account, APY is equal to one plus the periodic rate (expressed as a decimal) raised to the number of periods in one year. This value is then subtracted by one. Due to compounding, the APY will be greater than the periodic interest rate multiplied by the number of periods in the year.

Full Definition of Annual Percentage Yield

Whether you are borrowing money to make a large purchase or depositing your money in a financial institution so you can make money (e.g., savings account, certificate of deposit), you will need a basic understanding of some key financial terms: annual percentage rate, annual percentage yield, and finance charges.

The Annual Percentage Yield is the annual rate of interest plus the effect of compounding on the interest earned. This is the number quoted when banks and other financial institutions try to get you to deposit money in savings accounts or buy certificates of deposit.

In these cases, you are the lender, so the higher the APY, the more money you will make from amounts on deposit.

Example

  • 8-month CD
  • Interest rate = 4.65%
  • APY = 4.75%

Definitions

  • The principal in financial formulas is the balance upon which interest is paid.
  • Simple interest is interest paid only on the original principal, and not on any interest added at later dates.
  • Compound interest is interest paid on both the original principal and on all interest that has been added to the original principal.

Compound Interest Formula For Interest Paid Once a Year

A = P X (1+APR)Y

  • A   =   accumulated balance after Y years
  • P   =   starting principal
  • APR   =   annual percentage rate (as a decimal)
  • Y   =   number of years

The annual percentage yield (APY) is the actual percentage by which a balance increases in one year. It is sometimes also called the effective yield or simply the yield.

APY = relative  increase = absolute increase / Starting principal

Examples of Annual Percentage Yield in a sentence

The annual percentage yield was good because it was actually a return on the investment that we had made recently.

You should do your best to correctly calculate the annual percentage yield so that you know what to expect from it.

The annual percentage yield of the CDs offered by my bank is slightly greater than the nominal rate given interest is paid monthly and compounded throughout the year.

Related Phrases

annual return
interest rate

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https://payrollheaven.com/define/annual-percentage-yield/
Modern Language Association (MLA):
Annual Percentage Yield. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
January 18, 2022 https://payrollheaven.com/define/annual-percentage-yield/.
Chicago Manual of Style (CMS):
Annual Percentage Yield. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
https://payrollheaven.com/define/annual-percentage-yield/ (accessed: January 18, 2022).
American Psychological Association (APA):
Annual Percentage Yield. PayrollHeaven.com. Retrieved January 18, 2022
, from PayrollHeaven.com website: https://payrollheaven.com/define/annual-percentage-yield/

Definition Sources

Definitions for Annual Percentage Yield are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 5th November, 2021 | 3 Views.