Annual Percentage Yield, or APY, represents the total amount of interest earned on an investment or deposit account over the course of a year, taking into account the effects of compounding.
Unlike a simple interest rate, APY includes the interest earned on both the initial principal and on the interest previously earned.
This means that the more frequently interest is compounded (e.g., daily or monthly), the higher the APY will be, even if the nominal interest rate remains the same.
APY provides a more accurate measure of actual earnings or returns, and is commonly used for savings accounts, certificates of deposit (CDs), and other interest-bearing investments.