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The Annual Percentage Yield (APY)
What does Annual Percentage Yield mean?
The annual percentage yield is the effective annual rate of return. It is calculated by the resultant percentage that assumes funds will remain in the investment vehicle for a full 365 days.
Importance of Bond Yield
The annual percentage yield is the rate of interest earned or accrued over the course of a year or 365 days. It takes into account the effect of compounding. The annual percentage yield gives you a better sense of an investment's true return, and of a loan's true cost.
APY = (1 + r/n)n - 1
r = stated annual interest rate (nominal interest rate)
n = number of compounding periods per year
An account has a rate of 6% compounded monthly and the number of times compounded would be 12 one year (12 months). Therefore, according to the formula, the annual percentage yield (APY) is 6.1%.