Identification

• Banks and other financial companies always list the Annual Percentage Yield along with the Annual Percentage Rate for interest bearing accounts. The APY is always the larger of the two numbers. This is because the APY takes into consideration the compounding of interest, while APR does not.
  
  

Features

• An important consideration when determining Annual Percentage Yield is how often interest is compounded. The more often the interest is compounded, the higher the APY. An account that compounds interest daily yields more money than an account that compounds monthly or quarterly. This is because interest is being paid on interest that was previously earned. The more times this happens in a year, the higher the APY.
  
  

Function

• There is a simple formula to calculate the Annual Percentage Yield. Divide the Annual Percentage Rate by the number of times interest is compounded per year. For example, if interest is compounded monthly, there are 12 compounding periods; if daily, there are 365 compounding periods. Add the number 1 then multiply it exponentially by the number of compounding periods. Subtract the number 1 from that total to get the APY.
  
  

Effects

• Annual Percentage Yield is often used as a tool to compare different interest bearing accounts. It reveals which one will actually make the most money. The higher the APY, the more the account pays. Banks and financial institutions often pay a higher APY if more money is invested or the funds are committed to the account for longer periods of time.
  
  

Considerations

• Annual Percentage Yield is quoted on money accounts. Examples of these are interest bearing checking accounts, bank savings accounts, money market accounts and certificates of deposit. APY is not associated with bonds, stocks or other securities that have a fluctuating share price and no set interest rate.